Achieving fiscal sustainability in Japan

April 2011
OECD Economic Surveys: Japan;Apr2011, Vol. 2011 Issue 17, p43
Country Report
With gross government debt surpassing 200% of GDP, Japan's fiscal situation is in uncharted territory. Correcting years of rising debt will require a large and sustained effort. A detailed and credible multi-year fiscal consolidation plan that includes both spending cuts and revenue increases will be a top priority to maintain confidence and prevent a run-up in interest rates. Given the size of the adjustment in the fiscal balance needed just to stabilise the debt ratio in 2020 -- around 10% of GDP -- it is important to start fiscal consolidation as soon as possible, while taking into account the need to reconstruct areas devastated by the Great East Japan Earthquake. The consumption tax should be the main source of additional revenue, given that it is low and its impact on economic activity is less negative than other taxes. Tax measures should be accompanied by social security reform that limits spending increases, including in health care, and addresses problems in pensions. Given the large deterioration in Japan's fiscal situation since the collapse of the asset bubble in 1990 and the unprecedented size of its fiscal problem, a strong fiscal policy framework is important to reinforce the credibility of a medium-term fiscal plan. The framework may be improved through such steps as a multi-year budgeting plan, a stronger legal basis for the fiscal targets and an objective body at arm's-length from the policymaking process.


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