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IMF urges gradual consumption tax hike in rapidly graying Japan

Kyodo

The International Monetary Fund on Monday called on Japan to further raise its consumption tax rate in stages to fund growing social security costs, while warning that its public debt may reach up to 2.5 times the size of its economy by 2030 without credible fiscal policy.

The IMF proposal comes after the consumption tax rate was raised from 8 percent to 10 percent on Oct. 1 having twice being delayed. It was the first such tax hike in more than five years.

But in a report issued following annual consultations with the Japanese government, the IMF said the country’s consumption tax would need to be lifted to 15 percent by 2030 and to 20 percent by 2050 to finance swelling costs due to an aging and shrinking population.

“The consumption tax rate increases should be done gradually” on a regular, preferably legislated, schedule to smooth the economic impact and minimize policy uncertainty, the Washington-based institution said.

It also said the public debt is “unsustainable” under current policies and the country’s ratio of government debt to gross domestic product could exceed 250 percent in 2030 in the absence of a “credible fiscal policy framework including a concrete medium-term fiscal consolidation plan.”

Japan’s fiscal health is the worst among major industrialized economies, with its public debt-to-GDP ratio standing at 237.5 percent in 2019, according to the Finance Ministry.

Noting that the population is estimated to age and shrink by over 25 percent in the next 40 years, the IMF said the result will be depressed growth and productivity due to a reduced and aging labor force, which will “magnify” fiscal challenges as age-related spending rises while the tax base shrinks.

In addition to raising the consumption tax, the IMF proposed reforms to curb health care spending, the introduction of a wealth tax and a higher carbon tax as an incentive to reduce energy use.

“Without meaningful change to pension, health, and long-term care spending, fiscal sustainability may remain out of reach,” the report said.

In its most recent assessment of Japan’s economy, the IMF projected 2020 economic growth to remain resilient at 0.7 percent.

“Women’s labor force participation has increased significantly in recent years, but in coming years the shrinking and aging of the population will mean fewer and older workers — depressing both growth and productivity,” the IMF said.