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Consumption tax, reforms, incentives key to future growth

by Yoshio Nakamura

The Keidanren in September released a simulation of the medium- to longer-term prospects for Japan’s fiscal policies and social security programs. The simulation made itclear that unless the fiscal structure of the Japanese government is reformed, Japan’s outstanding public debt will likely expand to five times its gross domestic product, effectively putting the country in a state of bankruptcy.

Based on this simulation, Keidanren has recently compiled a set of proposals to ensure the nation’s fiscal sustainability.

First off, Keidanren proposes streamlining social security and local government expenditures. This proposal includes the goal of keeping any increase in medical and nursing care benefits below growth in nominal GDP, as well as reviewing the salaries of local government workers, who generally earn more than those hired by the central government and private-sector companies.

In addition, it stresses the need to ensure that tax revenue remains stable, and that the nation has a growth strategy that allows that to happen.

Keidanren has advocated hiking the consumption tax as a means to secure revenue. In Japan, there is a deep-rooted belief that hiking the consumption tax will negatively affect the economy. We therefore surveyed the impact that tax and social security burdens will have on the real economic growth rate by using a panel data analysis of statistics from member countries of the Organization for Economic Cooperation and Development spanning the past 30 years.

The results show that a consumption tax hike temporarily lowers economic growth, but has no negative long-term influence.

On the other hand, increasing income and corporate taxes and social security premiums pushes down growth over the short term and creates a lasting drag on growth in the following years, the study shows.

Based on this finding, we are repeating our proposal to stabilize tax revenue based primarily on hikes in the consumption tax.

As for Japan’s economic growth strategy, we are focusing on the role to be played by fiscal policy.

While pump-priming packages featuring large-scale public works projects — the kind repeatedly used in the 1990s — often have a short-term impact, they do not lend themselves to beefing up the nation’s longer-term growth potential.

We would like to instead focus on increasing that potential through supply side reforms in areas like technology, capital and labor. Of all the problems confronting Japan, the rapid aging of the population is the most serious because it will sharply reduce the labor force.

An estimate based on publicly disclosed forecasts of demographic trends says Japan’s GDP will decline by nearly 1 percentage point each year in and after fiscal 2025.

The Keidanren’s proposals include substantial measures to raise the birthrate so the nation can secure a sufficient workforce in the future. Specifically, we have called for compensating those who lose income as a result of childbirth and child care, and public expenditures to reduce the child-care costs for households.

Of course, economic incentives alone will not solve the problem, but such measures will hopefully be a big help for people hesitant to have children because they cost too much.

Japan’s government spending in this field is small compared with other industrialized nations, and we hope the fiscal authorities will focus on this area as they pursue further cuts in public expenditures.