International Monetary Fund chief Christine Lagarde urged Japan on Thursday to make sure that a nationwide consumption tax increase scheduled for next year does not hurt the country’s economic growth.
“We believe that the higher consumption tax will help fund growing health and pension expenses, and support fiscal consolidation,” Lagarde told a news conference in Tokyo following an annual consultation with the Japanese government.
“However, we also recommend that the 2019 consumption tax increase be accompanied by carefully designed mitigating measures to protect near-term reflation and growth momentum. We believe that the fiscal stance should certainly remain neutral at least for the next two years,” she said.
Economists fear the planned tax hike to 10 percent from the current 8 percent in October next year will trigger a wild swing in private demand that will put the brakes on the world’s third-largest economy, as the previous hike in 2014 did.
The IMF said in a statement that “temporary mitigating measures should be carefully designed to alleviate the adverse consumption impact,” pointing in particular to pricey purchases such as cars and homes.
The advice was essentially a thumbs up to the administration of Prime Minister Shinzo Abe, which is considering tax cuts for such products and has promised “extraordinary measures” in the budgets for fiscal years 2019 and 2020 to ensure the tax hike goes without a hitch.
Lagarde was somewhat less supportive of Abe’s decision to keep a lower consumption tax rate for daily necessities such as food and beverages, and newspaper subscriptions.
“Having one single rate is probably the most efficient way to design, structure and collect VAT,” the former French finance minister said, using the abbreviation for value-added tax.
“But, and here it is the former finance minister speaking who understands that sometimes having two rates can also not only focus on revenue collection, which is the necessary function of tax, but also to be accommodating to the social situation of people, particularly those with low income.”
The IMF, meanwhile, reiterated its stance that Japan should continue to gradually increase the consumption tax to at least 15 percent to pay for the cost of caring for a rapidly aging population while reducing its massive public debt.
Earlier in the day, Lagarde met separately with Prime Minister Shinzo Abe and Finance Minister Taro Aso. Lagarde and Aso will attend a meeting of the Group of 20 finance chiefs in Bali, Indonesia, next week.