Category: Video

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One Response to “How Japan’’s national debt grew so large”

  1. gemmoo11 says:

    The facts presented in this video are absolutely true but present a one-sided picture of where we are today.

    Social security is the single biggest item in the Japanese budget. The biggest item within social security spending is the public pension system. Participation in the public pension system is mandatory for anyone between the ages of 20 and 60 who is a resident of Japan. That means that everyone in Japan has a stake in the sustainability of the public pension system.

    Japan is the oldest society in the world. It is a demographic nightmare. Japan’s population is expected to decline by between 50% and 70% over the next 100 years. The ratio of retirees (aged 65+) to the working population is about 40% today. It is expected to rise to more than 50% by 2025 and to exceed 70% by 2050.

    It is no wonder that social security spending is such a huge and growing part of the national budget.

    However, Prime Minister Abe just approved a consumption (value added) tax hike from 5% to 8%, which will go into effect on April 1, 2014. The tax is expected to rise to 10% in October 2015. All revenue from the consumption tax is earmarked for social security–primarily the public pension system.

    By increasing the consumption tax, the government should be able to cover its share of annual public pension benefit payments without resorting to debt.

    This is the first step towards reforming public finances.

    The second step is the introduction of a taxpayer identification system. This is going to be phased in over the next three years.

    Although it seems unbelievable, Japan has not had a taxpayer identification system until now. The government has tried to introduce one several times over the past four decades but it has been political suicide. However, a series of scandals involving thousands of lost pension records have convinced the public that it is time to bite the bullet and accept an identification system that will identify individuals for tax, public pension and public health care purposes.

    A taxpayer identification system will make tax collection much more efficient. This will allow the government to broaden the tax base and lower tax rates while increasing tax revenue. Currently, 75% of all Japanese corporations do not pay tax and a similarly large number of individuals either pay no tax at all or greatly under-report their incomes. There is a lot of scope for increasing tax revenue and reducing the need for government debt issuance while reducing tax rates by increasing the efficiency of tax collections.

    Japan’s tax revenue portfolio depends on corporate taxes to a much greater extent than in other countries. The problem with that is corporate tax revenue is very volatile because it is based on corporate earnings. Increasing the weight of income taxes along with the higher consumption tax will provide a much more stable tax base, making it easier for the government to stimulate the economy during recessions without resorting to so much debt.

    I cannot argue with the facts presented in the video. But I would say that there are some major changes coming in the reform of Japan’s public finances over the next few years. Don’t be surprised to see Japan’s public debt:GDP ratio come down dramatically even as social security spending rises in the face of the country’s rapidly aging population. As long as these public finance reforms can be implemented without being derailed, this should ease concerns over Japan’s public debt and provide a strong case for new investment in Japan.