Fiscal Reform and Government Debt in Japan: A Neoclassical Perspective

Gary Hansen and Selahattin Imrohoroglu

No 13-E-10, IMES Discussion Paper Series from Institute for Monetary and Economic Studies, Bank of Japan

Abstract: Past government spending in Japan is currently imposing a significant fiscal burden that is reflected in a net debt to output ratio near 150 percent. In addition, the aging of Japanese society implies that public expenditures and transfers payments relative to output are projected to continue to rise until at least 2050. In this paper we use a standard growth model to measure the size of this burden in the form of additional taxes required to finance these projected expenditures and to stabilize government debt. The fiscal adjustment needed is very large, in the range of 30-40% of total consumption expenditures. Using a distorting tax such as the consumption tax or the labor income tax requires either tax to rise to unprecedented highs, although the former is much less distorting than the latter. The extremely high tax rates we find highlight the importance of considering alternatives that attenuate the projected increases in public spending and/or enlarge the tax base.

Keywords: Government debt; fiscal policy; aging; Japan (search for similar items in EconPapers)
JEL-codes: E2 E62 H6 (search for similar items in EconPapers)
Date: 2013-10
New Economics Papers: this item is included in nep-dge, nep-mac and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (26)

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Related works:
Journal Article: Fiscal Reform and Government Debt in Japan: A Neoclassical Perspective (2016)
Working Paper: Fiscal Reform and Government Debt in Japan: A Neoclassical Perspective (2013)
Working Paper: Fiscal Reform and Government Debt in Japan: A Neoclassical Perspective (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:ime:imedps:13-e-10

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