Many countries today require easy fiscal policy, together with plans to achieve fiscal rectitude in the long run. Given this, governments should provide specific fiscal-consolidation mechanisms that are visibly likely to take effect when the time comes.
CAMBRIDGE – In April 2014, Japan’s consumption-tax rate is set to rise from 5% to 8% in an effort to address the long-term problem of high public debt. But will the resulting loss in purchasing power bring an end to the Japanese economy’s fragile recovery, as many fear?
The question is reminiscent of April 1997. Larry Summers, who was then Deputy Secretary of the United States Treasury, repeatedly warned the Japanese government that if it proceeded with a scheduled consumption-tax hike, Japan’s economy would slide back into recession. I was in the US government at the time. As the date drew near, I asked Summers why he persisted in offering Japan’s leaders this unwanted advice, given that they were clearly locked in politically. Summers told me that he knew he was unlikely to change anyone’s mind, but that he wanted to be sure that Japanese officials recognized their mistake when they went ahead with the increase. Sadly, his prediction proved correct.
Today, Japan’s fiscal problems resemble those of the US and many other countries. The economy is weak, but the Bank of Japan (BOJ) cannot make monetary policy much more expansionary than it already is. And, while fiscal stimulus is called for in the short run, the long-term outlook for Japan’s public finances is deeply troublesome, owing to the huge debts run up in the past.
CAMBRIDGE – In April 2014, Japan’s consumption-tax rate is set to rise from 5% to 8% in an effort to address the long-term problem of high public debt. But will the resulting loss in purchasing power bring an end to the Japanese economy’s fragile recovery, as many fear?
The question is reminiscent of April 1997. Larry Summers, who was then Deputy Secretary of the United States Treasury, repeatedly warned the Japanese government that if it proceeded with a scheduled consumption-tax hike, Japan’s economy would slide back into recession. I was in the US government at the time. As the date drew near, I asked Summers why he persisted in offering Japan’s leaders this unwanted advice, given that they were clearly locked in politically. Summers told me that he knew he was unlikely to change anyone’s mind, but that he wanted to be sure that Japanese officials recognized their mistake when they went ahead with the increase. Sadly, his prediction proved correct.
Today, Japan’s fiscal problems resemble those of the US and many other countries. The economy is weak, but the Bank of Japan (BOJ) cannot make monetary policy much more expansionary than it already is. And, while fiscal stimulus is called for in the short run, the long-term outlook for Japan’s public finances is deeply troublesome, owing to the huge debts run up in the past.