Is Alesina fs Argument on the Tax-Spending Mix in Fiscal Consolidation Applicable to Japan?

This paper examines whether Alesina fs argument on the best mix of tax increases and spending cuts in fiscal consolidation is applicable to Japan. Alesina and his coauthors question the effectiveness of fiscal consolidation mainly relying on tax increases based on the mechanism that (1) public sector wage cuts lead to a private sector wage decrease and stimulate corporate investment, (2) an increase of wage tax and social contribution raises labor costs, and (3) governments can gain more public confidence in their fiscal consolidation by cutting public sector wages and transfer payment programs than by increasing taxes because the former measure is politically more difficult. However, their argument is not applicable to Japan as follows: (1) in Japan, public sector wages are determined in accordance with private sector wages under the system of recommendation by the National Personnel Authority, while the impact of public sector wages on private sector wages is limited under the company-specific labor union system. We confirm this point through the examination of Granger causality based on time series data on public sector wages and private sector wages as reported by the National Personnel Authority. (2) The comprehensive reform of social security and tax systems is intended to curb an increase in social insurance premiums that directly affects labor costs by raising the consumption tax. (3) In Japan, political opposition to a consumption tax increase is stronger. It would be very problematic to oppose an early implementation of consumption tax increases based on Alesina fs arguments without adequately examining whether the underlying factors of the argument are applicable to Japan.