The chief of the Organization for Economic Cooperation and Development suggested Wednesday that Japan raise the consumption tax from the current 8% to “at least 15%” in the future.
Speaking to reporters after a meeting in Tokyo with Prime Minister Shinzo Abe and other senior government officials, Secretary General Angel Gurria cited Japan’s high level of public debt against gross domestic product and a low sales tax rate compared with other developed countries as the reason for urging the rate increase.
Gurria said he suggested that Japan raise the consumption tax to 10% as scheduled in April next year unless there is a major economic shock on the scale of the 2008 collapse of U.S. investment bank Lehman Brothers or a major natural disaster.
The meeting, which also involved Shang-Jin Wei, chief economist of the Asian Development Bank, was the fifth in a series of hearings by Abe of foreign economists as part of preparations for a Group of Seven summit he will host in May.
Among the previous attendees, Paul Krugman and Joseph Stiglitz, both winners of the Nobel Prize in economics, suggested Japan forego the planned tax hike, fueling speculation that they were invited because Abe may be laying the groundwork for a delay.
Abe has said recently that raising the levy would be meaningless if it ended up reducing tax revenues.
On Wednesday, Gurria, a former Mexican finance minister, advocated raising the consumption tax rate to “at least 15%” in the future because “10 percent is not enough.”
“I believe this is an inter-generational issue,” he said. “This is about the future generations when you have debt to GDP of 230%.”
Gurria also pointed to the average of value-added tax of OECD member states standing at 20%, and that Japan has more room to increase the consumption tax rate above 10% to pursue fiscal sustainability.
But Gurria said Japan should raise the tax in a gradual way, such as by 1 percentage point per year, so as to minimize the tax hike’s potentially negative impact on the consumption patterns of people.
Stressing that it would be wrong for Japan to focus too much on the consumption tax, Gurria said Tokyo should implement a good combination of monetary policy, fiscal policy and structural reforms as a means to boosting “the productivity and competitiveness of the Japanese economy, which, among other things, has to have fiscal sustainability.”
Referring to the May 26-27 summit in Mie Prefecture, central Japan, the OECD chief urged the G7 leaders to pledge collective action for increased investment in such areas as infrastructure, education and skills “so that this could break some bottlenecks in the economy, increase productivity and then bring back” a lower debt-to-GDP ratio.
“We believe that this could be done by all the G7 and that they do it in a coordinated fashion,” he said. “This could have a very good effect, maybe it could even be transmitted to the G20 so that all the G20 can be doing this.”
Including the G7—Britain, Canada, France, Germany, Italy, Japan and the United States—the Group of 20 involves major developed and emerging economies such as Brazil, Russia, India and China.
Gurria, meanwhile, proposed that in light of the so-called Panama Papers revelations involving politicians and business leaders, the G7 leaders hammer out measures to stem tax avoidance at the summit, according to a Japanese official who briefed reporters about the meeting.
Speaking to journalists separately, Wei, the ADB chief economist, brushed aside concern that the Chinese economy may be heading toward a hard landing, saying Beijing has room for implementing stimulus measures on both fiscal and monetary fronts.
At Wednesday’s meeting, the start of which was open to the media, Abe said, “I would like to discuss with world leaders how Japan can contribute to achieving sustained and robust growth in the world economy” at the G7 summit.
Policy coordination in promoting world economic growth and stabilizing financial markets will top the agenda at what will be the first G7 summit in Asia in eight years.