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 in advanced economies. In this paper we ask 'if the consumption tax rate is raised to 15%, will there be a primary surplus, and what factors are important in achieving a fiscal balance?' Using the standard growth model's simulations as 'modern back-of-the-envelope' calculations, the quantitative findings indicate the critical need to contain government expenditures. Even an annual growth rate of 3% in GDP over the next 20 years may be insufficient to turn consistent primary surpluses, combined with a new consumption tax rate of 15%, unless prudent expenditure policies are implemented.
Keywords: Primary Balance; Fiscal Policy; Productivity; Growth Theory
Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.