We analyze fiscal policy and fiscal sustainability in Japan using a variant of the methodology developed in Blanchard (1990). We find that Japan can achieve fiscal sustainability over a 100-year horizon with relatively small changes in the tax-to-GDP ratio. Our analysis differs from more pessimistic analyses in several dimensions. First, since Japanese net debt is only half that of gross debt, we demonstrate that the current debt burden is much lower than is typically reported. This means that monetization of the debt will have little impact on Japan's fiscal sustainability because Japan's problem is the level of future liabilities not current ones. Second, we argue that one obtains very different projections of social security burdens based on the standard assumption that Japan's population is on a trend towards extinction rather than transitioning to a new lower level. Third, we demonstrate that some modest cost containment of the growth rate of real per capita benefits, such as cutting expenditures for shrinking demographic categories, can dramatically lower the necessary tax burden. In sum, no scenario involves Japanese taxes rising above those in Europe today and many result in tax-to-GDP ratios comparable to those in the United States.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
10988.
Length: Date of creation: Dec 2004 Date of revision: Handle: RePEc:nbr:nberwo:10988
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Find related papers by JEL classification: E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook H5 - Public Economics - - National Government Expenditures and Related Policies H6 - Public Economics - - National Budget, Deficit, and Debt
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Takero Doi & Takeo Hoshi, 2002.
"Paying for the FILP,"
NBER Working Papers
9385, National Bureau of Economic Research, Inc.
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