June 16, 2011 / 10:36 PM / in 7 years

IMF urges Japan to gradually triple sales tax

WASHINGTON (Reuters) - Heavily indebted Japan should soon begin a step-by-step process of raising its consumption tax to 15 percent to bring down public debt, the International Monetary Fund said on Thursday.

“A gradual increase in the consumption tax from 5 percent to 15 percent over several years -- a level that is still modest by OECD standard -- could provide roughly half of the fiscal adjustment needed to put the public debt ratio on a downward path within the next several years,” the IMF said.

The IMF staff discussion note calling for the tax increase echoes recommendations made in Tokyo on June 8 by the IMF’s acting managing director, John Lipsky, on how Japan can trim a public debt that is already twice the country’s $5 trillion gross domestic product.

Japan’s debt has been built up as the government tried to counter years of economic stagnation and the global financial crisis. The country’s March 11 tsunami and the still-unknown bill for dealing with the nuclear power crisis it sparked will place further strain on spending.

The IMF said the main culprits for the debt explosion were “the uninterrupted rise in social security spending due to population aging and weak economic growth that shrank Japan’s tax base relative to GDP” and warned these remained unchanged.

“With limited room to reduce non-social security expenditure and spending pressures from an aging society, new revenue measures must play a central role in a medium-term strategy to bring down Japan’s high level of public debt,” the IMF study said.

The IMF said Japanese policymakers should follow the “four S‘s” in hiking the consumption tax: do it sooner rather than later; implement stepwise increases; sustain the increases for some time; and keep the tax simple as it currently is, without exemptions and loopholes.

Japanese Prime Minister Naoto Kan made stabilizing public finances and reforms of the tax and social security systems policy priorities when he took office in June 2010.

A government panel this month recommended doubling the sales tax in stages over the next four years but Kan’s looming resignation and divisions in his ruling party cast doubt over whether the policy will be implemented.

Reporting by Paul Eckert; Editing by Leslie Adler

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