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.
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.