EDITORIAL: Fiscal reform and growth

In 1933, representatives of 66 nations gathered in London to discuss measures to lift the world economy out of the Great Depression. At that time, British economist John Maynard Keynes called for massive fiscal expansion, to be financed by debt if necessary. But his idea was not adopted at the meeting.

More than 70 years later, concerted fiscal expansion among major countries has been the crucial factor in the world's emergence from the global financial crisis triggered by the collapse of Lehman Brothers in 2008.

During the meeting of leaders from the Group of 20 major countries held last weekend, however, the United States and Europe remained divided over what should be done now. Shaken by the Greek debt crisis, European countries decided to shift their economic policies toward spending cuts and tax hikes to regain fiscal health despite opposition from the United States, which is calling for continued fiscal stimulus.

Thinking outside the box

What is the most effective prescription to end the worldwide recession and prevent a new crisis? Despite great progress in fiscal and monetary policies as well as modern economics since the days of the Great Depression, no clear answer has been offered to the question.

That's why researchers like Hiroyuki Kojima, professor at Teikyo University's Faculty of Economics, compare the study of economics to the state of physics long before Newton emerged.

Leaders of the G-20 countries agreed that industrialized countries should cut their fiscal deficits in half by 2013. But Japan, whose public debt nearly doubles its gross domestic product, was exempted from the target.

Prime Minister Naoto Kan's promise to seek fiscal rehabilitation and economic growth at the same time may have been regarded as a desperate attempt to avoid embarrassment. But Kan should make serious efforts to achieve the two objectives.

Kan says economic growth will not be hampered by a tax hike if the new money raised is used in a proper way. Kan's argument runs counter to conventional wisdom that the government should not raise taxes when the economy is in poor health.

But developing a new economic theory and implementing policy measures based on such a theory is what Japan and the world need now.

Japan's nominal GDP has not increased for the past two decades. Widening income gaps and growing poverty are causing social stagnation in this country. This is clearly the time for the government to set out in a new policy direction.

But no serious attempt has been made to secure new revenue sources to implement such policies. For more than a decade, the need for a tax hike has been constantly pointed out. However, successive governments have kept postponing efforts to tackle this challenge.

Tax hike finally discussed

At long last, though, Japanese politicians are showing a willingness to stop avoiding the issue of a consumption tax hike.

As one of its campaign promises for the July 11 Upper House election, the opposition Liberal Democratic Party says it would double the consumption tax rate to 10 percent.

In its election manifesto, the ruling Democratic Party of Japan pledges to start nonpartisan talks on a radical overhaul of the tax system, including the consumption tax, changing its previous stance of not discussing the hot-button issue. Kan has taken a step further and said he will consider the LDP's proposal to raise the levy to 10 percent as an option.

The Sunrise Party of Japan and the New Renaissance Party are also taking a positive stance toward a consumption tax increase. New Komeito is advocating a sweeping tax reform to secure revenue sources to enhance the social security system.

In contrast, the Social Democratic Party and the Japanese Communist Party are opposed to a consumption tax hike. The People's New Party and Your Party are distancing themselves from the growing chorus of calls for a consumption tax hike.

If Japan keeps refusing to confront the issue of raising the consumption and other taxes, the country will likely remain mired deep in debt even if spending for public services is sharply reduced. This reality makes it impossible to make a reasonable case against a tax hike.

There must be serious policy debate on how to secure tax revenue and use the money to protect and improve the people's livelihoods.

Simply defying the political taboo on proposing a consumption tax raise, however, is not enough. Raising the tax rate would be meaningless unless the additional revenue is used in a way that creates jobs and new markets to stoke economic growth.

Naturally, there are concerns about higher taxes crimping consumer spending and choking growth. But economic data for recent years suggests that doesn't necessary happen.

Sweden, despite its steep taxes and huge social security outlays, has managed to keep its economy growing as fast as that of the United States, where taxes are much lower. Japan is closer to the U.S. model, but its economy has been in the doldrums.

Using added revenue to create jobs

The question is, as Kan has said, how the government uses its additional tax income.

After many years of wasteful public works spending, the public naturally has a deep-seated distrust of the government. In order to win public support for a tax increase, the Kan administration needs to make clear its basic principles and specific plans concerning how it will use the new revenue to enhance welfare, education, environmental protection and achieve economic development.

Otherwise, the administration will be unable to realize the tax increase essential for pursuing its dual goals of fiscal reconstruction and economic growth.

The key to success is creating jobs. The government must provide as many jobs as possible for the 9 million unemployed and potentially job-losing people in Japan. Spending from additional revenue should be focused on creating new markets to stimulate investment and consumption in the private sector.

One promising idea is expanding government aid to create jobs in the areas of nursing, health and child care. Potential demand for such services is enormous. There are chronic shortages of caregivers, pediatricians and obstetricians. Great numbers of children across the nation are on the waiting lists for day nurseries.

The government needs to provide policy support to alleviate the supply shortages and provide more high-quality services in these areas.

By building many new child-care centers and special nursing-care homes for the aged, for instance, the government could meet the needs of hundreds of thousands of children and elderly citizens waiting for admission to such facilities while creating a sizable number of jobs.

Another promising area is the environment. The government could introduce a new environment tax to finance its efforts to stem global warming. In doing so, it should try to nurture new industries and create jobs by taking advantage of technological innovations.

Bolstering education and job-training programs to produce a pool of workers with skills necessary for working in new industries would be another effective way to lay the foundation for economic growth.

It is by no means easy to promote growth while taking measures to restore fiscal health. But this is a challenge the government should grapple with by using its intellectual resources. If it succeeds in pulling off this policy feat, Japan will make a great contribution to the world as the inventor of a new economic policy model to overcome a crisis.

--The Asahi Shimbun, July 2