10% isn’t so bad…

No time for serious thinking these days – need to do real work and marking.

One thing has struck me in all of this quite interesting debate on the increase in the consumption tax . Why Kan et al, who now seem committed to going all out before an election (brave) to propose an increase during the term of the current Lower House, are not making this into a bit of ‘nationalist’ issue?

One of the things that has allowed the Japanese government to run the ridiculous deficits it has, is the government being able to finance it through the sale of government bonds, in particular to domestic institutions such as the Post Office who of course, hold a fair sum of the public’s private savings. The big issue on the horizon, that has not really been a factor in previous discussions of the consumption tax from the 80s onwards, is that pretty soon the level of government debt is going to surpass the slowly but surely declining Japanese private savings base. This means that further deficits will have to be financed by borrowing from foreign institutions.

Over and above the fact you are no longer keeping the money ‘within the family’ this is seen by many to be problematic because foreign borrowing is likely to be at a much higher than the current 0.1% rate currently offered by the Bank of Japan, thus making the debt even more difficult to manage. Equally problematic, is that not only will ‘Japan’ have to work harder (or smarter) to keep the debt under control, the fruit of that hard work will be transferred out of the economy by way of the government paying foreign entities more and more money just to finance the debt. This is not only wealth lost by the public, but is money lost that could have been put towards increasing R&D investment or creating more value-added employment (which in turn would allow the debt be paid back faster by increasing the tax base).

I know none of the above is original insight – but I would have thought that a more simplified version of what I have ventured above would probably appeal to the populous a lot more than technical arguments about appropriating the additional tax receipts from the increase in consumption tax specifically for social security, and whether that will allow people to be comfortable enough to consume more, thereby fighting deflation in the long-term. It may all be true – but it would probably be easy for the public to be distracted by the arguments around it.

I am not being cynical here in terms of the ability for populist politicians to score cheap points from directing the threat outwards – I really do think it is an important point that is conspicuous by its absence in the current pre-election debate on the consumption tax increase.

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