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IMF Recommends Hike In Japan's Consumption Tax

by Mary Swire,, Hong Kong

14 September 2011

While Prime Minister Yoshihiko Noda’s new government seems to be looking to bind both ruling and opposition parties into a gradual tax-increasing policy, the International Monetary Fund (IMF) has indicated that it believes Japan’s economy could absorb more substantial consumption tax hikes.

The government has confirmed that it is planning on presenting, by the middle of next month, a JPY10 trillion (USD130bn) third supplementary budget to finance reconstruction in the earthquake and tsunami-hit north-east of Japan, and that, while the government will make efforts to also reduce excessive and wasteful public spending, it may well have to ask taxpayers for additional revenues.

A council appointed by the previous government had, earlier this year, recommended that the government should issue, over a five-year period, reconstruction bonds to finance the third supplementary reconstruction budget. Those special bonds would be drawn to coincide with reconstruction needs during that period, and their servicing and repayment would be linked to a temporary increase in a mix of the country’s ‘core taxes’ – presumably, consumption, individual income and corporate taxes.

In addition, the previous government had a medium-term policy target of funding the country’s increased welfare payments and halving Japan’s primary budget deficit (excluding interest payments) to approximately 3% of gross domestic product by 2015, largely by the means of doubling consumption tax to 10% in stages, the timing of which would be determined by the strength of future growth in the domestic economy.

Kenneth Kang, from the IMF’s Regional Office for Asia and Pacific Department, has, at a seminar entitled "Raising the Consumption Tax in Japan: Why, When, How?", suggested that, while striking a balance between new revenue measures and limits on spending, the Japanese government’s strategy for raising consumption tax should be "sooner rather than later", while tax increases should also be effected in stages and be sustained over time.

The IMF believes that, given that both the country’s sales taxes and its overall tax revenues are relatively low as a percentage of gross national product, in comparison with other developed countries, the Japanese economy could withstand a consumption tax rise as soon as next year, particularly if that was used solely to finance reconstruction and obviate the need for further bond issuance.

Overall, it proposes that the government’s objective should be to increase consumption tax to 15% in the three fiscal years from 2012 to 2014. Such tax rises, Kang is reported to have said, would ensure that Japan’s net debt ratio would be reducing by the middle of the decade, reduce the possible need for more drastic action later, and strengthen fiscal confidence on which to base future economic growth.

It has been said, however, that it is easier to suggest such tax rises for Japan, than it is to put them into effect. The ability of the government to introduce tax rises appears to remain low unless the current implacable parliamentary opposition, that is able to block legislation in parliament, is removed.

TAGS: tax | economics | sales tax | fiscal policy | budget | International Monetary Fund (IMF) | legislation | tax rates | Japan

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