|"Fiscal Discipline/Government Debt Management and Monetary Policy"|
|WATANABE Tsutomu (RIETI Faculty Fellow / Professor of Institute of Economic Research, Hitotsubashi University)|
|"Tax Reform from the Perspective of Economic Revitalization"|
|SAKATA Ichiro (RIETI Consulting Fellow / Deputy Director, Corporate Affairs Division, Economic and Industrial Policy Bureau, METI)|
|"The Political Economy of Tax Reform"|
|KUNIEDA Shigeki (Assistant Professor, Graduate School of International Corporate Strategy, Hitotsubashi University)|
|FUJIKI Hiroshi (Deputy Director, Institute for Monetary and Economic Studies, Bank of Japan)|
|MORINOBU Shigeki (Visiting Professor, GRIPS / Director General, Tokyo Customs)|
In the fourth session, Faculty Fellow Tsutomu Watanabe presented his report titled "Fiscal Discipline/Government Debt Management and Monetary Policy." He argued that just as the stock market provides discipline to corporate management, government bond prices and the value of a nation's currency provide discipline to fiscal management. On such occasions, the central bank's monetary policy also played a pivotal role, he said. However, he added that because market prices are based on the principle of relative evaluation, there were limitations to the extent to which market discipline could affect fiscal management.
Consulting Fellow Ichiro Sakata made his presentation, "Tax Reform from the Perspective of Economic Revitalization." He explained that an increase in the tax burden was inevitable in order to correct the fiscal deficit, but said that it was a prerequisite important that economic vitality was not sacrificed in doing so. He saw recent changes in the decision-making process concerning taxes as a positive development, and stressed that the clarification of existing philosophies was necessary when considering the future path of tax system reforms. Specifically, he called for reviews of the current classification of business units and a comprehensive overhaul of the various institutions that encompass tax, accounting and the Commercial Code.
Shigeki Kunieda, assistant professor at Hitotsubashi University's Graduate School of International Corporate Strategy, presented his report titled "The Political Economy of Tax Reform." He explained that the current fiscal deficit was a phenomenon that goes beyond the inter-temporal budget constraint equation, and from the perspective that future generations are being exploited by the present one it was the result of the decentralized political system that has been in place since the 1990s. In order to resolve this problem, he suggested the enactment of a "basic law to ensure generational equality."
Hiroshi Fujiki of Research Division I of the Bank of Japan's Institute for Monetary and Economic Studies, and Professor Morinobu commented on these reports. First, Mr. Fujiki summarized the model of Watanabe's report by explaining that the government and the central bank are considered as one unit called an integrated government, that prices were elastic and that price arbitration is at work in the goods and bond markets and that the outlays of fiscal authorities are assumed to be non-Ricardian. He then explained that under the policy proposals made by Faculty Fellow Watanabe, in the event of a shock that would lead to a deterioration in real primary balance, there would be a choice of either "maintaining current prices, raising interest rates and allowing government bond prices to fall" or "maintaining interest rates and condoning an immediate rise in price levels," but even if the former were to be chosen, the two options were linked in that prices would rise in the long term. In closing, Mr. Fujiki said it was very interesting that the Watanabe report viewed the relationship between government bond prices, price levels and monetary policy as an analogy of a model that determines corporate value. He asked for specific examples of shocks that could lead to a deterioration in real primary balance when natural interest rates were fixed, and why Professor Watanabe recommended the former option in an economy where prices were elastic.
Professor Morinobu, in commenting on the Kunieda report, said that judging from his own administrative experience in dealing with tax reforms such as raising consumption tax, the role of the Diet and the securing of agreements between the ruling and opposition parties was important. He also suggested that it would be beneficial for a forum for discussion to be set up in the Diet. In response to the Sakata report, he pointed out that the reason the Ministry of Finance's Tax Bureau did not use the term "vitality" was because it could be linked more to Keynesian tax cuts rather than supply-side tax cuts. As for simplification of the tax system, he commented that the issue of enforceability, which was still an unfamiliar concept in Japan, would have to be taken into consideration.
Faculty Fellow Watanabe responded by saying a situation where primary balance deteriorated while natural interest rates remained fixed would not apply to present-day Japan, but could apply to Japan in the future, and that in such a situation, the two channels cited here could work well. Consulting Fellow Sakata agreed that the concept of enforceability was important when considering tax simplification. He also pointed out that tax authorities should recognize the fact that even though there are few provisions in tax legislation it does not mean that the system is simple, but only that there is much room for discretion on matters not written into the laws, and this makes the tax system complicated for companies. He also commented that the Ministry of Economy, Trade and Industry was suggesting the abolition of the Special Taxation Measure Law and the unification of tax breaks for investments by small and medium-sized enterprises was proceeding, and that the tax system was likely to take on a more comprehensivel design in the future.
Assistant Professor Kunieda responded by saying that while such major issues as consumption tax need to be decided by the will of the Diet, he had such matters as the Special Tax Measure Law in mind when he had spoken of the need for administrators to pay a central role. Furthermore, he pointed out that because Japan has always implemented tax cuts and tax hikes together and there had never been a net increase in taxes, special measures such as a multi-party agreement or the Constitution would have to be utilized. He added that he felt tax increases were necessary and indispensable, and that while they must be put on hold for the time being out of consideration for economic recovery, it was an issue that must be addressed within a limited amount of time.
In the discussions that followed, Professor Iwamoto pointed out that the ideas cited in the Watanabe report had been widely discussed within academic circles, and that there were those who took a critical stance on them. He added that the model called for a framework in which fiscal policies decided prices, but questioned whether or not it was necessary to take into account the role of currencies, wondered if non-Ricardian outlays would make it impossible for the government to convert government bonds and what the incentive linking these two channels to actual fiscal reform could be. Consulting Fellow Takahashi commented that if the second channel of inflation were to work well amid Japan's current deflation, this would be more desirable. Professor Kitamura said the report did not take the indefinite future into account, and asked what sort of realistic time frame was in mind. Consulting Fellow Watanabe responded that it was very well possible that government bonds might crash because the government would be unable to convert them. On the issue of the indefinite future, he answered that time frames of 10 years and 30 years were in his mind, as he was considering the maturity of government bonds.
(Text compiled and edited by KIMURA Yuji, RIETI Research Staff)