Premature Tax Cuts Increased Japan’s Long Term Government Debt

Over at the Institute for New Economic Thinking there is a fascinating presentation by Nomura Research Institute Chief Economist Richard Koo. He shows what happened when Japan prematurely cut taxes in the late 1990’s and early 2000’s.

 

The reduced tax revenue because of the premature changes in Japanese tax policy was JPY103.3 trillion. In 2012, Japanese government debt stands at almost JPY1,100 trillion – so some 10% of Japanese government debt can be traced back to these cuts. While Japan would still be running a budget deficit and have substantial government debt, any possible reduction in these two things is arguably good in the long run.

I’m interested in exploring whether all of the negative things I’ve read about Japan are true. Could they become Greece because of their enormous debt levels? What impact will their declining population have on their government finances? If big brands like Sony and Toshiba are making massive losses, what can that tell us about Japanese productivity and innovation levels?

Tomorrow I’ll be looking at the effect of the changes in tax policy in New Zealand since 2005 and their impact on the government deficit. Have tax cuts and Working for Families accelerated the increase in government debt? With unemployment at a 13 year high, were tax cuts really a solution for creating new jobs?