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Yujiro Oiwa

【#364】Government Should Take Accountability for Fiscal Risks

Yujiro Oiwa / 2016.03.24 (Thu)

March 22, 2016

     The Japanese government in mid-March started a series of “international financial and economic analysis meetings” where Prime Minister Shinzo Abe and economic ministers exchange views with Japanese and foreign experts. It has explained that the meetings are designed for Japan to fulfill its responsibility as the chair of this year’s Group of Seven Summit rather than deciding whether to implement the planned consumption tax increase next April. Given the experts selected for the invitation to the meeting at the Prime Minister’s Office, however, we cannot take the government explanation as it is.
     Although the consumption tax increase is aimed at securing stable financial resources for social security benefits to consolidate the budget, the government failed to explain about fiscal risks while emphasizing only economic concerns when it decided on November 18, 2014, to postpone the tax increase from 8% to 10% for one year and a half. While the rumor of another postponement of the tax hike is spreading, the government should make the decision from the long-term viewpoint involving fiscal risks rather than the short-term viewpoint involving present economic conditions.

Experts to be invited to analysis meeting
     If I convene international financial and economic analysis meetings to counter the government meetings, experts to be invited may include R. Anton Braun, Research Economist and Senior Policy Adviser at the Federal Reserve Bank of Atlanta, Prof. Gary Hansen, University of California, Prof. Carmen Reinhardt, Harvard University, Prof. Kenneth Rogoff, also of Harvard and a former director of research at the International Monetary Fund, Prof. Keiichiro Kobayashi, Keio University and Prof. Kazumasa Oguro, Hosei University.
     Braun said that Japan would have to raise the consumption tax to 33% in fiscal 2017 to stabilize the budget at once without holding down social security spending. Hansen, Kobayashi and Oguro similarly estimated that the tax should be increased to 31-35%. If the tax hike is postponed, the tax may have to be raised to even higher levels. If the hike is put off until 2022, the tax may have to be raised to 37.5% to produce the same effect, Braun said.
     If outstanding government debt as a percentage of gross domestic product topped 90%, economic growth would drop by 1 percentage point, Reinhardt and Rogoff said in 2010, indicating that budget deficits would hinder economic growth. Rogoff said that Japan with by far the heaviest government debt among industrial countries (at 230% in 2015) would have no choice but to consolidate the budget through tax hikes and spending cuts in order to prevent interest rate hikes through further massive government debt issuance from triggering economic stagnation.

Financial collapse by 2030 without consumption tax hike?
     The government should not postpone the consumption tax hike again for the reason of economic deterioration without fully explaining about fiscal risks. Oguro warns that Japan may suffer financial collapse around 2030 if it keeps the consumption tax at the present level of 8%. The Cabinet Office’s economic and fiscal projections for medium to long-term analysis fail to give estimates for years after 2024. The government should present prospects for fiscal sustainability and propose fiscal consolidation options to the people.

Yujiro Oiwa is a JINF Planning Committee Member and Professor at Tokyo International University.