Jun Okumura raised some questions regarding the op-ed in the Wall Street Journal Asia that I co-wrote with Naomi Fink. Naomi has penned the following reply to Jun.
I contest the points on fiscal policy as follows:
If you do not count the Y6trn stimulus portion of the FY09 budget (which Jun Okumura has not) then you do get 4% rather than 5. It certainly is not trivial, but I guess the argument is whether this amount should have been included or not - I went by the Nikkei's breakdown of stimulus, which included the 6trn yen. I am certainly receptive to arguments about the increases in general budget spending as necessary anyway, etc. But I am not sure whether this is the argument that Jun is making. But in my mind, I favour counting it - not because I wish to make the LDP look generous in its largesse, but simply because it is an increase in spending that maybe ought to be assessed as "stimulus" in order to measure its growth multiplier. So if we measure the rise in domestic consumption growth of 0.8% versus the stimulus package (yes I realise I am comparing an annualised quarterly growth figure versus expenditures whose components might or might not be disbursed evenly throughout the year), the rise does not look particularly impressive, considering that consumption is over 58% of GDP as of Q2. And yes, since it is part of the general budget, we assume it will be gone by next FY.
2. The fiscal lending and special account is indeed part of the "buried treasures" that the DPJ hopes to tap. But not all of it diminishes as a result of stimulus - for instance, part of this comes from the FX special account, which comprises revenue on Japan's foreign reserves, which have according to the MOF roughly about Y4trn per annum, half of which has already been tapped to pay exernal liabilities. JBIC has also been given the right to use these for overseas dollar lending. This is probably a much more productive use of foreign reserves than rolling them over into ever lower-yielding US Treasuries. Of course, the question of reducing the balance of reserves (funded purely by issuing short-term debt) is another matter, and liquidation of these reserves might be a more practical solution of Japanese short-term interest rates rise). So in this sense, this source of revenue is unsustainable, yet its very unsustainability is tied to reflation.
3. Yes, much of the stimulus does consist of "borrowed money", and this is why I think he might be missing my point about the primary balance as an important measure of fiscal discipline. Primary balance excludes bond revenues, as well as interest payment and debt redemption. Thus, if tax receipts do not rise in tandem with debt issuance, then you will see a decline in the primary balance... expenditures minus (primarily) government tax revenues. Which means that the debt issued has had an insufficient multiplier. My point is not that the DPJ will be able to govern debt-free, but that it has the opportunity to reduce debt issuance if it wants to. The primary balance is in supposed to be a target, and the DPJ can set it realistically - if it targets an average reduction of the deficit certain amount - say 10% over the first two years (just a hypothetical figure) then it must either spend less and reduce debt issuance or raise tax revenue in order to achieve that goal.
That is again why I favour privatisation and reduction of the government's balance sheet - another source of revenue from other sources than issuance of debt. The whole point is to ensure that expenditures are productive, which if not a measure of fiscal austerity is certainly a measure of fiscal responsibility. This is why it is not an unimportant short-term point that the DPJ might abandon just in order to win an election - if spending proves unproductive, it will probably (barring a massive global economic boom that will bring exports back beyond year-ago levels) lose elections in the future.
4. The point on timing of expenses is a very good one, and admittedly, I have never studied the capacity for back-dated receipts to draw a disproportionate amount from the fiscal pool in a particular quarter. I agree however that the most that the DPJ will be able to do with current stimulus is fine-tune rather than completely redirect, assuming that "cutting waste" will not be immediately possible. So: suspend disbursements of future expenses? Hardly, that is why I made a point point about metrics for productivity as conditions for future disbursements, and widening the corporate tax base. You use the same amount of money for more productive means, and thereby achieve a better multiplier. The problem in Japan is that there appears a belief that all forms of fiscal stimulus are created equal. As we might see by the decline in potential growth from above 4% (OECD estimates) before the bursting of the bubble to 1%, possibly to dip further, unproductive spending damages future growth. Also, see my point below on tighter enforcement of current guidelines - making sure expenses are legitimate is one way to ensure tax exemptions and subsidies actually correspond to consumption or investment (and thus growth) rather than to hoarding of cash.
5. On the consumption tax rise, David Ricardo did argue that consumers would build in an expectation to pay more tax in the future when deficits balloon. However, he admitted that consumers are subject to a "fiscal illusion" that prevents fiscal deficits from translating to immediate expectations of reduced purchasing power. So arguably, consumers are not reducing consumption and saving more because they know that they will have to pay more taxes in the future. They are saving because neither employment or investment income is growing, which is very much a private sector concern (I have charts from the Cabinet office sentiment survey that show the parallel moves in personal income and confidence). In fact (as was the case before Germany's tax hike), when the economy is already growing, then consumption should increase in response to the announcement of a tax hike. Conversely, if consumption is not growing, the government will garner diminishing returns from the tax hike (as experienced under Hashimoto in 1997).
6. Widening the corporate tax base: Certainly, the DPJ's commitment to put its foot down on tax incentives is a good idea - but again, this will take time. In the meantime, what about more strictly enforcing current guidelines such that they crack down on existing evasion? This would be a start in the first year, before they legislate. This would be one course of immediate action - in order not to crush existing consumption, focus on the big tax evaders rather than trying to bring down the largest number of tax evader). Since even Switzerland is cracking down on tax evasion, this might be a good time to join the crew. If some small businesses were put under the same scrutiny employed by the American IRS on small business, they would probably find another type of "buried treasure".
The whole point is indeed to get all businesses to pay more corporate taxes than they do now, and raising tax revenues. But again, you do this by ensuring more companies grow and become profitable. First you do this by lowering the bar (and corporate tax rate) and incentivising companies to become profitable in the first place, rather than stay south of the borderline. You also crack down on tax evasion, which disincentivises companies from staying unprofitable as to benefit from tax exemptions on expenses without paying taxes on revenues.
Exceptions might be made, but again, the unprofitable small business should be the exception rather than the rule.
7. "None of its recommendations will be adopted by the DPJ." Isn't the point of writing an op-ed to raise issues that have not but should be considered, rather than narrate what the party is already likely to do?
I contest the points on fiscal policy as follows:
If you do not count the Y6trn stimulus portion of the FY09 budget (which Jun Okumura has not) then you do get 4% rather than 5. It certainly is not trivial, but I guess the argument is whether this amount should have been included or not - I went by the Nikkei's breakdown of stimulus, which included the 6trn yen. I am certainly receptive to arguments about the increases in general budget spending as necessary anyway, etc. But I am not sure whether this is the argument that Jun is making. But in my mind, I favour counting it - not because I wish to make the LDP look generous in its largesse, but simply because it is an increase in spending that maybe ought to be assessed as "stimulus" in order to measure its growth multiplier. So if we measure the rise in domestic consumption growth of 0.8% versus the stimulus package (yes I realise I am comparing an annualised quarterly growth figure versus expenditures whose components might or might not be disbursed evenly throughout the year), the rise does not look particularly impressive, considering that consumption is over 58% of GDP as of Q2. And yes, since it is part of the general budget, we assume it will be gone by next FY.
2. The fiscal lending and special account is indeed part of the "buried treasures" that the DPJ hopes to tap. But not all of it diminishes as a result of stimulus - for instance, part of this comes from the FX special account, which comprises revenue on Japan's foreign reserves, which have according to the MOF roughly about Y4trn per annum, half of which has already been tapped to pay exernal liabilities. JBIC has also been given the right to use these for overseas dollar lending. This is probably a much more productive use of foreign reserves than rolling them over into ever lower-yielding US Treasuries. Of course, the question of reducing the balance of reserves (funded purely by issuing short-term debt) is another matter, and liquidation of these reserves might be a more practical solution of Japanese short-term interest rates rise). So in this sense, this source of revenue is unsustainable, yet its very unsustainability is tied to reflation.
3. Yes, much of the stimulus does consist of "borrowed money", and this is why I think he might be missing my point about the primary balance as an important measure of fiscal discipline. Primary balance excludes bond revenues, as well as interest payment and debt redemption. Thus, if tax receipts do not rise in tandem with debt issuance, then you will see a decline in the primary balance... expenditures minus (primarily) government tax revenues. Which means that the debt issued has had an insufficient multiplier. My point is not that the DPJ will be able to govern debt-free, but that it has the opportunity to reduce debt issuance if it wants to. The primary balance is in supposed to be a target, and the DPJ can set it realistically - if it targets an average reduction of the deficit certain amount - say 10% over the first two years (just a hypothetical figure) then it must either spend less and reduce debt issuance or raise tax revenue in order to achieve that goal.
That is again why I favour privatisation and reduction of the government's balance sheet - another source of revenue from other sources than issuance of debt. The whole point is to ensure that expenditures are productive, which if not a measure of fiscal austerity is certainly a measure of fiscal responsibility. This is why it is not an unimportant short-term point that the DPJ might abandon just in order to win an election - if spending proves unproductive, it will probably (barring a massive global economic boom that will bring exports back beyond year-ago levels) lose elections in the future.
4. The point on timing of expenses is a very good one, and admittedly, I have never studied the capacity for back-dated receipts to draw a disproportionate amount from the fiscal pool in a particular quarter. I agree however that the most that the DPJ will be able to do with current stimulus is fine-tune rather than completely redirect, assuming that "cutting waste" will not be immediately possible. So: suspend disbursements of future expenses? Hardly, that is why I made a point point about metrics for productivity as conditions for future disbursements, and widening the corporate tax base. You use the same amount of money for more productive means, and thereby achieve a better multiplier. The problem in Japan is that there appears a belief that all forms of fiscal stimulus are created equal. As we might see by the decline in potential growth from above 4% (OECD estimates) before the bursting of the bubble to 1%, possibly to dip further, unproductive spending damages future growth. Also, see my point below on tighter enforcement of current guidelines - making sure expenses are legitimate is one way to ensure tax exemptions and subsidies actually correspond to consumption or investment (and thus growth) rather than to hoarding of cash.
5. On the consumption tax rise, David Ricardo did argue that consumers would build in an expectation to pay more tax in the future when deficits balloon. However, he admitted that consumers are subject to a "fiscal illusion" that prevents fiscal deficits from translating to immediate expectations of reduced purchasing power. So arguably, consumers are not reducing consumption and saving more because they know that they will have to pay more taxes in the future. They are saving because neither employment or investment income is growing, which is very much a private sector concern (I have charts from the Cabinet office sentiment survey that show the parallel moves in personal income and confidence). In fact (as was the case before Germany's tax hike), when the economy is already growing, then consumption should increase in response to the announcement of a tax hike. Conversely, if consumption is not growing, the government will garner diminishing returns from the tax hike (as experienced under Hashimoto in 1997).
6. Widening the corporate tax base: Certainly, the DPJ's commitment to put its foot down on tax incentives is a good idea - but again, this will take time. In the meantime, what about more strictly enforcing current guidelines such that they crack down on existing evasion? This would be a start in the first year, before they legislate. This would be one course of immediate action - in order not to crush existing consumption, focus on the big tax evaders rather than trying to bring down the largest number of tax evader). Since even Switzerland is cracking down on tax evasion, this might be a good time to join the crew. If some small businesses were put under the same scrutiny employed by the American IRS on small business, they would probably find another type of "buried treasure".
The whole point is indeed to get all businesses to pay more corporate taxes than they do now, and raising tax revenues. But again, you do this by ensuring more companies grow and become profitable. First you do this by lowering the bar (and corporate tax rate) and incentivising companies to become profitable in the first place, rather than stay south of the borderline. You also crack down on tax evasion, which disincentivises companies from staying unprofitable as to benefit from tax exemptions on expenses without paying taxes on revenues.
Exceptions might be made, but again, the unprofitable small business should be the exception rather than the rule.
7. "None of its recommendations will be adopted by the DPJ." Isn't the point of writing an op-ed to raise issues that have not but should be considered, rather than narrate what the party is already likely to do?
2 comments:
A much better idea than trying to wade through the thicket of corporate tax exemptions is to just cut the baseline corporate tax. Corporate tax in general is a much worse way of raising money than personal tax (consumption or income tax). Every dollar of revenue raised by "broadening the corporate tax base" probably hurts the economy considerably more than if that dollar were raised via personal tax.
Of course, I favor graduated income taxes over consumption taxes...
mm. nice post.
Post a Comment