TOKYO: Following Prime Minister Shinzo Abe’s recent decision to postpone the increase in the consumption tax rate that was due to take effect in April next year, the International Monetary Fund (IMF) has suggested that Japan should commit instead to “a path of smaller, but sustained increases over a prolonged period” to achieve fiscal consolidation.
Japan’s eight percent consumption tax rate was originally programmed to increase to 10 percent in October 2015, but it will now not take place until October 2019 at the earliest. Abe has also indicated that the Government will introduce additional fiscal stimulus measures later this year to counteract continuing economic uncertainties.
Japan’s current fiscal consolidation strategy aims to bring the primary deficit of the general account of the central and local governments into balance by the fiscal year from April 2020 to March 2021. However, in its concluding statement of the 2016 Article IV Mission in Japan, the IMF said that “the stop-go nature of yearly supplementary budgets [and] discretionary changes in consumption tax hikes … has left fiscal policy without a credible medium-term anchor and are contributing to policy uncertainty.”
It also noted that the challenge to the Government of “simultaneously stimulating the economy and moving towards fiscal sustainability in a short timeframe.”
It recommended that “a credible fiscal consolidation course needs to be charted now, including a pre-announced path of gradual consumption tax hikes … towards at least 15 percent, e.g. by 0.5 or one percent per year over regular intervals.” This, it added, “would strike the right balance between supporting growth and achieving fiscal sustainability in the long run.”
“Starting the increases soon and replacing the currently planned 2019 hike with such a pre-announced, gradual path,” the IMF concluded, “would enhance the credibility of the long-run fiscal adjustment. … The single rate structure should be maintained as much as possible and concerns for the tax impact on low income households addressed by targeted cash transfers.”
