WASHINGTON – The International Monetary Fund on Monday urged the government to go ahead with the consumption tax hike next April as planned, saying it is “an essential first step to contain fiscal vulnerabilities.”
In its annual report on the Japanese economy, the IMF said that “the scheduled tax increases in April 2014 and October 2015 should proceed as planned as they are critical to maintain confidence in the ability of the government to address the fiscal problem.”
The Abe administration plans to make a final decision this fall on the tax hike. Some economists have proposed delaying the increase out of concern it could weigh on the bid to reinflate the economy.
If implemented as planned, the consumption tax would rise to 8 percent in April from the current 5 percent, and to 10 percent in October 2015.
“Introducing multiple rates (featuring a lower tax rate for food and other daily necessities) should be avoided as it would severely dilute revenue gains, complicate tax administration, and impose a costly administrative burden on small and medium-sized enterprises,” the Washington-based organization said.
“Instead, targeted transfers could be considered to compensate low-income households.”
The IMF also stressed the need for the government to formulate a concrete set of growth-friendly revenue and expenditure measures for implementation in the medium term to achieve a declining debt-to-gross domestic product ratio.
Beyond 2015, Japan could gradually increase the consumption tax to “a uniform rate of at least 15 percent, closer to OECD averages,” while “an ambitious and concrete consolidation plan is urgently needed” to bring down public debt, the IMF said.
Meanwhile, IMF executive directors noted that Japan’s near-term economic prospects have improved with the adoption of unprecedented radical monetary easing and the usual fiscal stimulus while structural reform pends.
But they added that “the growth outlook is subject to significant risks, primarily stemming from incomplete domestic reforms and a weaker external environment, and that sustained implementation of the authorities’ reform program is the best way to minimize these risks.”
As for the Bank of Japan’s aggressive monetary policy, the IMF said it should make an important contribution to end deflation, while pointing out that “careful communication and flexibility in execution are essential to contain market volatility.”