RIETI Report January 2015

Toward the Integrated Reform of Expenditures and Revenues Ver. 2.0

In November 2014, Prime Minister Shinzo Abe announced his decision to postpone the planned consumption tax rate hike originally scheduled for October 2015 by 18 months to April 2017, and also pledged to: 1) implement the planned tax hike with no further delays regardless of the economic conditions, 2) adhere to the goal of achieving a primary surplus by FY2020, and 3) develop specific plans toward that end by summer 2015. Reconciling the two conflicting policies--a growth strategy as the third arrow of Abenomics and fiscal consolidation--will be the most important policy agenda for the Abe administration in 2015. In the January issue of the RIETI Report, we present RIETI Faculty Fellow Kotaro Tsuru's column "Toward the Integrated Reform of Expenditures and Revenues Ver. 2.0."

Tsuru first looks at the problems with the "flexibility clause" in regard to the consumption tax rate not being raised. Although the enforcement of the clause should have been based on a comprehensive review of economic conditions to confirm the favorable development of the economy, he questions whether Japan's economic conditions were so bad as to postpone the hike. He claims that in assessing economic performance, it is important to look at not only changes but also levels. Next, he discusses the significance of having a three-year period in between consumption tax rate hikes as the optimal length of time for the effects of the previous tax rate hike to dissipate. He advocates a two or three percentage point hike every three years in 2017, 2020, and 2023 to reach a level comparable to value-added tax rates in Europe (above 15%). Finally, Tsuru talks about specific plans to achieve fiscal consolidation by FY2020, including making prudent and conservative assumptions for fiscal forecasts, specific cuts in social security, and further consumption tax rate hikes.

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This month's featured article

Toward the Integrated Reform of Expenditures and Revenues Ver. 2.0

TSURU KotaroFaculty Fellow, RIETI

On November 18, 2014, Prime Minister Shinzo Abe announced his decision to postpone the planned consumption tax rate hike originally scheduled for October 2015 by 18 months to April 2017. At the same time, he pledged to: 1) implement the planned tax rate hike with no further delays regardless of the economic conditions, 2) adhere to the goal of achieving a primary surplus by FY2020, and 3) develop specific plans toward that end by summer 2015. In this light, it is fair to say that how to reconcile two conflicting policies—a growth strategy as the third arrow of Abenomics and fiscal consolidation—will be the most important policy agenda for the Abe administration in 2015.

Was Prime Minister Abe's decision to postpone the planned consumption tax rate hike right? That is for historians in future generations to decide. My personal belief is that Prime Minister Abe should have increased the consumption tax rate as originally planned. However, this policy change has certain commendable aspects as it provides some important suggestions that would be helpful in considering plans for fiscal consolidation going forward.

To read the full text
http://www.rieti.go.jp/en/columns/s15_0008.html

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