IMF urges tax increase to tackle Japan debt

WASHINGTON, July 14 Wed Jul 14, 2010 4:00pm EDT

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WASHINGTON, July 14 (Reuters) - The International Monetary Fund on Wednesday urged Japan to act soon to reduce its huge public debt using measures including a gradual increase in its consumption tax.

In documents published alongside the IMF's annual review of Japan's economy, IMF staff said an adjustment of about 10 percent of gross domestic product over a decade was needed to stabilize and reduce government debt.

The IMF said while such an adjustment could be achieved in a number of ways, raising the consumption tax should be a centerpiece of those efforts.

It suggested that increasing the consumption tax to 15 percent starting in fiscal year 2011 could generate revenue of 4 to 5 percent of GDP.

The IMF said the severe recession and large fiscal stimulus measures pushed Japan's public debt to 218 percent of GDP. Without a fiscal adjustment, public debt would rise and approach 250 percent of GDP by 2030, it added.

With the proportion of debt to GDP reaching historical levels and one of the highest among rich nations, the IMF said fiscal consolidation was unavoidable in Japan.

"While a part of the adjustment could come from the expiry of fiscal stimulus package and cyclical factors, given the limited space for further expenditure cuts, the rest of the adjustment would have to rely on additional revenue measures including increases in the consumption tax," the IMF said in a staff document.

The IMF said it was concerned about how such a large adjustment with a tax hike would affect economic growth in the short run but noted it would pay off over the medium-term.

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