Taxation and Public Debt in a Growing Economy : The Japanese Experience

Abstract

One of the most remarkable images of Japan in the eyes of the world is the unstoppable phenomenon of rapid economic growth, although the era of high growth is gone since the late 1970s. Needless to say, fiscal performance by the government must have substantially been affected by such trends. This paper analyzes how the government has been influenced in managing the budget every year by taxes and public debt in a growing economy. After summarizing main features of the Japanese fiscal behavior as compared with those of other countries, we examine two topics. One is to make the empirical analysis of generating tax revenues abundantly in rapid economic growth, and of the subsequent phenomena occurring during the slowdown of growih rates. The other is to consider how to assess tax reductions adopted by the government prior to the mid-1970s as fiscal dividend. I. The Purpose and Outline o This Study t f One of the most remarkable images of Japan in the eyes of the world is the unstoppable phenomenon of rapid economic growth. In fact, Japan is now seen as a great power, comparable with the United States in terms of economic and competitive strength, as the result of its postwar economic miracle. Although the performance of Japan's economy is still relatively successful, the era of high economic growth is no doubt gone since the late 1970s. From two oil crises in 1973 and 1979 throughout the first half of the 1980s, Japan experienced the slowdown of its growth rates and faced fundamental economic changes. It was widely acknowledged that the real growth rates were greatly reduced from 10 percent to 5 percent in 1973 and once again to 3 percent in 1979. In other words, the Japanese economy has changed from the high-growth era to the lower, stable growth era in the past decade [see. Patrick and Rosovsky (1976), Lin-