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Consumption tax key to fixing Japan’s debt-ridden finance: IMF

Consumption tax key to fixing Japan’s debt-ridden finance: IMF

TOKYO: The consumption tax should remain at the heart of revenue reform in Japan, but the pacing of rate increases is crucial, the International Monetary Fund said Monday.

Citing the need for fiscal consolidation to address risks from Japan’s high level of public debt, the IMF said, “The consumption tax remains a preferred option for raising additional revenue given its low rate, broad base, and applicability across age groups.”

In a paper compiled by an IMF staff team, the Washington-based institution said raising the sales tax rate — currently at 8 percent — is likely to be “less detrimental” to growth than other major tax options such as the personal income tax and corporate tax.

In a separate report released the same day following annual consultations with the Japanese government, the IMF said IMF directors “broadly supported” a pre-announced path for a gradual and sustained increase in the consumption tax.

With Japan’s gross public debt projected to exceed 240 percent of gross domestic product in 2017, the government plans to raise the tax to 10 percent from 8 percent in October 2019.

However, a few IMF directors pointed to risks associated with implementing the planned tax hike, apparently in light of the uncertain outlook for the world’s third-largest economy.

According to the paper, revenue collected from the consumption tax is relatively low compared with value-added tax collections from other industrialized economies, leaving room for an increase.

The sales tax distributes the tax burden more equitably across age cohorts, “ensuring those entering retirement pay a fair share toward the cost of retirement support,” it said.

Compared to consumption tax increases, personal income tax hikes would lead to increased labor cost for companies, resulting in a decrease in job supply. Corporate tax increases would cause a drop in capital investment.

In its assessment of Japan’s economy, the IMF expects the nation’s growth momentum to carry through this year but weaken next year if fiscal support fades as currently scheduled, according to the separate report.

Recent growth, bolstered by fiscal support and firmness of the world economy, “could be temporary,” it said.

Measured by real GDP, the IMF estimates the economy will grow 1.3 percent in 2017, up from 1.0 percent in 2016. Growth, however, is projected to slow to 0.6 percent in 2018.

“The possible expiration of fiscal support in 2018, together with a smaller expansion in foreign demand would reduce the rate of growth, despite an anticipated Olympics-related boost in private investment,” the report said.

The IMF urged Japan to promote the use of foreign workers and the participation of women and elderly people in the labor market as part of efforts to address challenges for achieving firmer and sustained growth.

The IMF suggested Japan advance “reforms to bolster investment as well as diversifying and enhancing labor supply to raise potential growth.”

“To this end, full-time work, female and older labor market participation, and use of foreign labor should be facilitated,” it said.

Citing a working culture based on long hours, the IMF said such a practice “prevents the economy from fully benefiting from the contribution of Japan’s highly-educated women.”

The report offered a positive assessment of recent movements of the yen, saying, “The substantial real effective exchange rate appreciation in 2016 had moved the yen to a level consistent with fundamentals.”

To underpin Japan’s growth, the Bank of Japan should maintain its accommodative monetary policy, it said.