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Japan: PM Kan’s Dubious Economics
• Prime Minister Kan has said that tax hikes
and increased government spending can boost
economic growth. We fundamentally disagree
with this assertion.
• Kan might feel that there will be a relatively
high fiscal multiplier if the government
increases spending now, at a time when there
are still substantial idle resources, on the
assumption that taxes will be hiked when the
economy is sustainably expanding. But that is
just a case of macro-stabilisation, which can
only temporarily support a falling growth rate.
• There is little evidence that tax money spent
by the government in the name of promoting
growth is effective. In any event, because
Japan’s huge public debt must be repaid some
day, the fiscal multiplier should, from a longterm
perspective, be deemed less than 1.
• While many might support the proposition
that tax hikes to increase government spending
on healthcare and nursing would boost
economic growth, the root problem in
nursing/healthcare in Japan is not the lack of
money but unnecessary regulation that prevents
the provision of services that people want.
• Although talks on tax hikes will probably
stall over the short term now that the
government has lost its Upper House majority,
the Kan government needs to change its
thinking on taxes and growth if history is not to
judge its policies harshly.
Kan’s strange contention
Barely one month has elapsed since the Kan
government was born and its de facto election mode
from the very outset means its policies so far have
just a generalised sense of direction and little
content; this makes a critique all but impossible.
Nevertheless, we comment here on something that
troubles us: Kan’s contention that a tax hike
(specifically the consumption tax) can lead to
economic growth. Is the tax hike meant to repair the
state finances or to reform the nation’s social welfare
systems? Or is it to supply revenue for financing
some other objective (a growth strategy)? Our
apprehension springs from Kan’s vagueness on this
point. If Kan sees a tax hike as a “growth strategy,”
namely as a means of securing revenue to stoke
domestic demand with more government spending,
he is fundamentally mistaken in our view.
Government has the correct three objectives
but…
When the Kan Government was inaugurated, the
prime minister stated that the goal of his government
would be to achieve a “strong economy, robust public
finances and strong social security system”. At that
time, we argued that, because these objectives are
contingent upon each other, their simultaneous
pursuit could indeed be the right path for achieving
the ultimate objective of bettering the economic
welfare of the Japanese people, or, in other words,
achieving a higher level of consumption on the back
of increased and sustainable income growth. We
also warned, however, that focusing just on one
objective, say social security, might lead to a
momentary jump in consumption but the health of the
economy and state finances would suffer because
future generations would have to pay a larger bill.
Admittedly, simultaneously pursuing all three
objectives is easier said than done. But stopping the
potential growth rate from falling, avoiding a debt
crisis and correcting the defects in social security are
all grave structural problems that Japan cannot
ignore. Having long argued for the necessity of
quickly addressing these problems, we lauded the
Kan government for making them top priorities.
Additionally, when the Kan government unveiled its
strategy for fiscal restructuring with the Upper House
election just weeks away, we saw it as both correct
and courageous. The prime minister’s subsequent
comments, however, have been less encouraging,
especially those linking a tax hike with economic
growth – which suggests that he deems the former as
a means of bolstering the latter.
One frequently hears about tax cuts, not hikes,
bolstering economic growth. Indeed, such a view has
long been advocated both in economic circles and by
business. The contention is that cuts in income taxes
boost work incentives, while lower corporate taxes
improve profits ratios and encourage capital
formation, both then translating into some degree of
improvement in the potential growth rate. The basic
argument here is that tax increases and/or heavy tax
burdens stifle economic activity.
Ryutaro Kono 16 July 2010
Market Mover
18
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