Discussion Paper Series 2010-E-23

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

Selahattin Imrohoroglu, Nao Sudo

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.

Copyright © 2010 Bank of Japan All Rights Reserved.

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