IMF tells Japan to raise taxes after the recovery

28 Jan 22

Japan will need to increase tax revenue to contend with major challenges such as its huge public debt and ageing population according to International Monetary Fund economists.

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Japan

Tokyo, Japan. Image © iStock

In their regular appraisal of Japan’s economy, the economists said its tax takings relative to the size of its economy are low compared to G7 countries, “pointing to room for increased revenue mobilisation”.

They suggested increasing the sales tax, removing preferential property tax treatment of residential land, reducing the number of allowances and deductions relating to personal income tax and increasing capital income tax.

“Once the recovery is firmly in place, it will be important to rebuild fiscal buffers gradually and ensure debt sustainability over the medium to long term,” they said in a statement.

Japan’s already-high debt-to-GDP level increased further as a result of Covid-19, shooting from 236% in 2019 to 259% last year.

The IMF said without any new policies, the budget deficit will fall to 2% of GDP in 2024, but then “rise gradually over the long term due to age-related spending pressures” such as healthcare and pensions.

“Debt rollover and issuance risks are contained in the near term, helped by a large domestic savings base, home bias, and a debt profile with no foreign currency debt,” the IMF staff said.

“However, debt sustainability risks will rise as demographic trends weigh in the medium and long term.

“Medium-term fiscal consolidation should aim to put public debt on a downward path and strengthen the ability to respond to future shocks.”

The economists said the large fiscal stimulus put in place during the pandemic helped buoy the economy, but it “could have been better targeted”, for example by reducing the eligibility for cash transfers so only those on especially low incomes received it.

They also urged Japan to limit the practice of creating supplementary budgets in the future only to when responding to large unexpected shocks, rather than as the common practice they currently are, to increase predictability and stability.

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