OECD Head Urges Japan To Fix Finances, Hike Consumption Tax

It’s globally unanimous.

And it’s moving the euro zone closer to the waterfall.

OECD Head Urges Japan To Fix Finances, Hike Consumption Tax

By Kelly Olsen

April 25 (Bloomberg) — The head of the Organization for Economic Cooperation and Development said Wednesday that Japan must get its fiscal house in order, and he supports the government’s plan to raise the consumption tax to help achieve that.

Doubling the consumption tax to 10% by 2015 “is an important step,” Angel Gurria, head of the Paris-based organization, said in a speech.

The government of Prime Minister Yoshihiko Noda submitted legislation to parliament in March that would raise the consumption tax from the current 5% in two stages. But the plan has come under fierce criticism from opposition parties and members of Noda’s own ruling Democratic Party of Japan who fear it may damage the fragile economic recovery.

Gurria said the fiscal situation requires action, pointing out that while Japan’s public debt, at more than 200% of gross domestic product, has so far been manageable given relatively low interest rates, that may not always be the case.

“Japan is vulnerable to a run-up in interest rates,” Gurria said. He said the debt situation is in “uncharted territory.”

During a question-and-answer session, Gurria was asked if he would favor raising the consumption tax before 2014 by one percentage point a year.

“I think it makes sense,” he said, noting it would start generating revenue faster, could be combined with adjustments to other taxes, and suits the gradual nature of Japan’s politics. “I think it has less risks than the present formulation,” he said.

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23 Responses to OECD Head Urges Japan To Fix Finances, Hike Consumption Tax

  1. Anders says:

    Stevek9 – in that scenario govt just needs to harden its fiscal stance to manage down purchasing power. This will keep a lid on inflation.

    But to the robots point, whilst people are ageing, the retirement age and tech-aided productivity is rising too; finally, the power of the employment/popn may even persuade the Japanese to welcome foreigners. I don’t expect any demographic ‘shocks’ as such.

    Reply

  2. SteveK9 says:

    I’ve wondered if this is plausible: Japan is saving a lot because it is aging. When those retirees finally spend their saved money, there will not be enough productive capacity for the goods and services they want, and inflation will result. Either that or those robots will save the day. Opinions?

    Reply

    chewitup Reply:

    @SteveK9,
    What does retirees spending their saving have to do with productive capacity? What am I missing? As long a resources are available, the working population should be able to take care of retirees, at least on a subsistence level. Politically, who knows?

    Regarding robots, according to some of my MIT friends, robots should be able to program themselves in another 20 years or so, making us superfluous. We will all be consigned to “pet” status. I’m hoping they will at least take me out for a walk once a day. I like fresh air.

    Reply

    SteveK9 Reply:

    @chewitup, If a large part of the population is retired then the productive capacity of the non-retired may not be able to support the products and services that they want and that the retirees want. Maybe the retirees don’t want to live on a subsistence level? If they have the money and spend it, then prices will rise if their aren’t enough goods to meet the demand.

    I’m not sure why this is hard to understand.

    Reply

    chewitup Reply:

    @SteveK9,
    I guess I just don’t see that happening in Japan. Their demographics tilt on the older side compared to most other countries, but not to the extent you describe. The example Warren gives in 7DIF is extreme, but inflation is plausible If demand outpaces what they are able to produce.

  3. Art Patten says:

    Gurria seems awfully certain for someone discussing “uncharted territory.”

    Reply

    roger erickson Reply:

    @Art Patten,
    Exactly. They always are. So is the OECD, Japan-elite, Harvard, etc, etc.
    Reality is already known to the orthodox, why adapt it? Once any change is fully noted – from a comfortable armchair – there’ll be ample time to have [any surviving] servants make the proper adjustments.

    Reply

  4. Monty says:

    Perhaps a complete global collapse is needed for the policy makers to truly grasp the concept of soft currency economics.

    Reply

  5. roger erickson says:

    We used to send people with taxing consumption to sanitariums. Over the years, tuberculosis persisted more than many other infectious diseases in part because of two traits:
    a) very slow growth can desensitize immune response;
    b) isolating infectious agents within bureaucratic cysts helps them evade early detection by host defenses & thereby continually reinfect the host.

    The system parallels between TB & policy ignorance are striking.

    Both can easily result in survival threats highly resistant to standard remedies.

    Reply

  6. Tyler says:

    Over at his blog, Jared Bernstein is trying his best to persuasively argue for tax increases. Here’s one of his latest posts on the subject: http://jaredbernsteinblog.com/the-economic-impact-of-raising-taxes-on-high-income-households/

    Reply

    roger erickson Reply:

    @Tyler,

    A growing Output Gap means return-on-coordination is down. In a grossly constrained fiat system, no redistribution of taxation can be the entire solution. We need 10x more net output, not JUST shuffling tax chairs.

    Reply

    Tyler Reply:

    @roger erickson,

    Bernstein doesn’t offer tax increases as the entire solution to the output gap, but it’s bad enough that he offers them as part of the solution.

    Reply

    Dan Kervick Reply:

    @Tyler, Why not have both higher taxes on the rich and higher spending?

    Reply

    Tom Hickey Reply:

    @Dan Kervick,

    Do the numbers. The stimulus ended up in corporate profits. Of course, the higher end should be taxes on what is essentially windfall profits, that is, economic rent, since it did not come from increasing investment. If politicians are concerned with “paying” for social spending, this is where to get it. And the social spending will flow back to the top anyway due to the institutional structure of the economy, just like the stim did.

    Reply

    Dan Kervick Reply:

    @Tom Hickey, Yep, a lot of it trickles up. Whatever money the rest of us get, we have to put it in our bank accounts, where it is all packaged and bundled into investment instruments so the financial industry can take a cut and blow up bubbles that increase the costs of everything else. Excessive financial costs are extracted all along the production and distribution cycle as well.

    ESM Reply:

    @Tom Hickey,

    “And the social spending will flow back to the top anyway due to the institutional structure of the economy, just like the stim did.”

    You and Warren always blame institutional structure for the fact that people have different attitudes towards saving and work. It is inevitable that extra money pumped into the private sector will predominantly leave the hands of the spendthrifts and end up in the hands of the misers.

    But at least the spendthrifts enjoyed their spending, which they might not have been able to do except for the existence of the misers.

    @Dan:

    “Whatever money the rest of us get, we have to put it in our bank accounts, where it is all packaged and bundled into investment instruments so the financial industry can take a cut…”

    This comment doesn’t make sense. The banks don’t need your money. They really only want you as a customer so they can upsell you stuff. If you’re small scale and don’t buy any of their other services, then you’re almost certainly costing them money.

    “… and blow up bubbles that increase the costs of everything else.”

    Oh, you mean like the internet bubble which made bandwidth so ridiculously cheap that the world is now at your fingertips for $35/month and a $300 computer?

    I don’t see the financial industry blowing up the price of anything except capital assets, which generally has the reverse effect of lowering the price of consumer goods and services. Even the housing bubble had the effect of lowering rental rates.

    WARREN MOSLER Reply:

    with 0 savings desires, there would be no deficit spending to begin with.

    and the likes of tax advantages for pension funds tend to create ‘savings desires’, great biggins, in fact

    Tom Hickey Reply:

    @Tom Hickey,

    ESM: “It is inevitable that extra money pumped into the private sector will predominantly leave the hands of the spendthrifts and end up in the hands of the misers.
    But at least the spendthrifts enjoyed their spending, which they might not have been able to do except for the existence of the misers.” It’s just a narrative underling a moral argument.

    That’s the simplistic way to look at it. It’s also a matter of space for saving. The is no space at the bottom where people are living close to subsistence or under subsistence. There is little space in the middle, other than forced saving (FICA) and advantaged pension plans. Savings space doesn’t begin to open significantly until one reaches the upper rungs of the middel class and then expands rapidly and even luxury consumption is insufficient to exhaust revenue at the top.

    ESM Reply:

    @Tom Hickey,

    “It’s just a narrative underling a moral argument.”

    I’m neither making a moral argument nor a moral judgment. My statement was neutral in the sense that I used perjoratives for both spenders and savers (which I did for the thigh-slappingly, ROFLMAO comedic effect).

    But the fact is, whether the government increases net transfers to the private sector by reducing taxes, increasing spending, or by increasing entitlement transfers, the extra money will mostly end up with the people who already have a lot. And there’s nothing wrong with that if the other people got extra goods and services in exchange.

    The only problem I foresee is that people like you and Dan Kervick will continue to complain about income and wealth inequality because increased government deficits will only exacerbate those “problems.”

    Tom Hickey Reply:

    @Tom Hickey,

    ESM, increased deficits are NOT the cause of the problem. Failure to tax away economic rent is. That is an institutional problem structured by the tax code that has been skewed to tax work instead of rents. What his does is encourage rent-seeking behavior that leads to inequality and its consequences, which Galbraith’s recent work is now bringing to the fore.

    WARREN MOSLER Reply:

    it’s a political option

    Reply

    Tyler Reply:

    @Dan Kervick,

    Since we know that federal taxation destroys money, I don’t see the benefit of raising taxes on the rich. It’s a contractionary policy when the focus should be on expansionary policy.

    We should cut taxes on the 90 percent. This would stimulate the economy and reduce inequality.

    Reply

    WARREN MOSLER Reply:

    right, the point now isn’t to take $ out of the economy.

    however, if one is bent on taxing ‘the rich’ for social engineering purposes, they should also be proposing spending increases or tax cuts elsewhere to get the deficit where it needs to be to close the output gap

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