U.S. Nobel laureate and economist Joseph Stiglitz said Wednesday that he had advised Prime Minister Shinzo Abe to delay a sales tax increase scheduled for next year and focus more on fiscal spending to boost a recovery from recession.
Abe is meeting with foreign economists to help him prepare for hosting a Group of Seven summit in Japan in May. Stiglitz told Abe that the G-7 needs to coordinate policy as weak aggregate demand was harming the global economy and contributing to income disparity.
The G-7 talks, according to some economists, could give Abe a convenient reason to postpone tax hikes, relax fiscal austerity and introduce more stimulus to avoid relying too much on monetary policy.
“A consumption tax increase now would be going in the wrong direction,” said Stiglitz, a professor at Columbia University.
“This is a time to have stimulating fiscal policy.”
Stiglitz, 73, was the lone nonpublic official at the first of five panels on the global economy, billed as Japan’s preparations for the G-7. Abe and his team will meet Thursday with Dale Jorgenson, a Harvard University professor who has advocated taxing U.S. energy use, and with former BOJ Deputy Gov. Kazumasa Iwata, a prominent advocate of reflation and aggressive monetary stimulus. Another laureate, Paul Krugman, has been invited to speak on March 22.
Abe is scheduled to raise the nationwide sales tax to 10 percent from 8 percent in April next year, but some of Abe’s closest advisers are calling for the plan to be shelved.
Abe raised the levy to 8 percent from 5 percent in April 2014, as agreed under the previous government to curb Japan’s massive public debt, but the move triggered a recession and some economists say consumer spending still has not fully recovered.
Stiglitz told Abe that the government needs to adapt its policies in response to changes in the economy, and that taxes on carbon emissions could be a better way to spur innovation and improve domestic demand.
Stiglitz, who counseled against fiscal austerity in late-1990s Asia and in Europe in recent years, also said inheritance taxes could provide a boost while reducing inequality, and urged the consideration of a structure that lowered taxes on companies that invest, but raised them on those that did not.
At Wednesday’s session at the Prime Minister’s Office, Abe said global economic conditions will be the main theme of the summit.
The prime minister appreciated Stiglitz’s policy proposals, saying he “received very sound suggestions that it is important for the G-7, including Japan, to create global demand,” according to a government official.
Gloomier prospects for the world economy and recent market routs — amid a Chinese slowdown and declining crude oil prices — have fueled speculation Tokyo could be forced to delay the sales tax hike, which is almost certain to weigh on already sluggish private consumption.
Abe has indicated he has not ruled out delaying the hike if implementing it in April 2017 could trigger a sharp decline in economic activity and a plunge in tax revenues.
A Group of 20 summit last month called for more fiscal spending and less reliance on monetary policy to help the fragile global economy, which some investors say has reached its limit after years of quantitative easing and negative real interest rates.
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