Strategies for Fiscal Consolidation in Japan

Author/Editor: Botman, Dennis P. J. ; Edison, Hali J. ; N'Diaye, Papa M'B. P.
Publication Date: February 01, 2007
Summary: Japan's key fiscal challenge is to put public finances on a more sustainable footing. This paper investigates the macroeconomic implications of alternative fiscal strategies for Japan using the IMF's Global Fiscal Model. The results suggest that: (i) an adjustment package that achieves primary balance through lower social transfers and government spending and a higher VAT is the most viable option and has a smaller negative impact on growth than other fiscal measures; (ii) achieving primary balance is not sufficient to stabilize the net debt ratio; (iii) prefunding future aging costs provides greater long-term benefits compared with less front-loaded strategies; (iv) tax reform involving shifting from corporate taxation to consumption taxation could mitigate the short-term output losses associated with fiscal consolidation; and (v) the spillovers to the rest of the world from consolidation in Japan are positive in the medium term, but modest.
Subject(s): Fiscal policy | Japan | Tax reforms | Aging | Adjustment policy | Debt sustainability analysis | Public finance | Economic models

Author's Keyword(s): Fiscal adjustment | aging | debt sustainability | tax reform | spillover effects | GFM
Publication Date: February 01, 2007
ISBN/ISSN: 1934-7073 Format: Paper
Stock No: WPIEA2007037 Pages: 22
US$18.00 (Academic Rate:
US$18.00 )
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