The Impact of Fiscal Consolidation and Structural Reforms on Growth in Japan

With Japan's public debt reaching historical levels, the need for fiscal consolidation and structural reforms have increased. As fiscal consolidation will require a sustained and large adjustment in the fiscal balance, its growth effect is a concern particularly for the short run. This paper us...

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Bibliographic Details
Published in:Policy File 2011
Main Author: Berkmen, Pelin
Format: Report
Language:English
Subjects:
Budgets/Expenditures
Economic policy
Government
International Monetary Fund
Online Access:Request full text
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Summary:With Japan's public debt reaching historical levels, the need for fiscal consolidation and structural reforms have increased. As fiscal consolidation will require a sustained and large adjustment in the fiscal balance, its growth effect is a concern particularly for the short run. This paper uses the IMF's Global Integrated Monetary and Fiscal Model to analyze the growth impact of fiscal consolidation and structural reforms. Although fiscal consolidation has short-term costs, the potential long-term benefits are considerable, and reforms that raise potential growth could support consolidation. Simulations show that the external environment also matters but domestic policies should be the priority.