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Productivity and Fiscal Policy in Japan: Short-Term Forecasts from the Standard Growth Model

Author

Listed:
  • Selahattin Imrohoroglu

    (Professor, Department of Finance and Business Economics, Marshall School of Business, University of Southern California (E-mail: simrohor@marshall.usc.edu))

  • Nao Sudo

    (Deputy Director, Institute for Monetary and Economic Studies (currently, Research and Statistics Department), Bank of Japan (E-mail: nao.sudou@boj.or.jp))

Abstract
Japan is facing severe fiscal challenges. The aging of the population is projected to raise total pension and health expenditures. There is already a huge debt to output ratio, which is the highest among the advanced economies. In this paper we ask, "If the consumption tax rate is raised to 15 percent, will it generate a primary surplus, and what factors are important in achieving a fiscal balance?" With the standard growth model's simulations as "back-of-the-envelope" calculations, the quantitative findings indicate the critical need to contain government expenditures. Even an annual growth rate of 3 percent in GDP over the next 20 years may be insufficient to produce consistent primary surpluses, combined with a new consumption tax rate of 15 percent, unless prudent expenditure policies are implemented.

Suggested Citation

  • Selahattin Imrohoroglu & Nao Sudo, 2011. "Productivity and Fiscal Policy in Japan: Short-Term Forecasts from the Standard Growth Model," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 29, pages 73-106, November.
    • Handle: RePEc:ime:imemes:v:29:y:2011:p:73-106
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    Keywords

    Primary balance; Fiscal policy; Productivity; Growth theory;
    All these keywords.

    JEL classification:

    • E00 - Macroeconomics and Monetary Economics - - General - - - General
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General

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