The IMF has issued a warning to Japan over its increase in public spending following the March earthquake.
If Japan is to continue being a “positive force in the region”, it must consolidate its fiscal position by cutting back on the additional spending which has pushed its public debt to new levels.
Japan’s rate of public debt is currently 220 per cent of its GDP – the highest level among advanced economies.
The IMF report predicts “GDP growth is likely to slow to -0.7 per cent this year before rising to 2.9 per cent in 2012.”
“Fiscal consolidation would also benefit Japan’s partners by releasing a pool of savings for other countries to borrow and reducing risks from a disruption in the Japanese government bond market,” says the report.
Given Japan has one of the lowest tax revenues in the world, the IMF recommends reconstruction spending be financed by an a 2-3 per cent increase in the consumption tax, to 8 per cent. This should then be increased further to 15 per cent.
Under existing government proposals, the sales tax will be doubled to 10 per cent by the mid-2010s.