The Shinzo Abe-led government has said it will release a medium-term fiscal plan later this year, and OECD Secretary-General Angel Gurria said that plan should include “spending cuts and tax increases large enough to bring the budget back into primary surplus by 2020 and stabilise the public debt ratio”.
To address Japan’s fiscal situation, the OECD economic survey states it is “necessary” to implement the planned consumption tax hike from 5% to 8% in 2014 and to 10% in 2015.
“But Japan will also need additional tax revenue,” the report continues. “Even with the hike in the consumption tax to 10%, the rate remains about one-half of the average in OECD countries.”
It suggests that further hikes in the consumption tax rate would be a useful policy, “given its relatively small negative impact on economic growth”.
“Japan could also broaden its income tax basis, primarily by increasing environmental taxes,” suggests the OECD.
Chizuko Tomita, of Morrison Foerster, said she agrees that indirect tax hikes are necessary for Japan.
“I understand that the Japanese government relies too much on direct tax revenue compared to other OECD countries,” said Tomita.
However, Tomita said she is not sure whether implementing the OECD suggestions will necessarily bolster Japanese economic growth.
“But we do not have any option, considering the current balance of government bonds as well as the foreseen reduction of direct taxpayers,” said Tomita. “I think most Japanese citizens understand this necessity.”
The OECD country report also touted the possibility of introducing a price on carbon.
“Developing renewables will promote green growth, while helping Japan achieve its target of reducing its greenhouse gas emissions. This would require a price on carbon, through a carbon tax in combination with an emissions trading system.”
The OECD also recommended a carbon pricing policy for China when it released its economic survey last month.
Tomita said the policy is likely to be adopted in Japan at some point.
“Although,” she warned, “it may take some time.”
