Because history is written by Keynesians, many people have a highly distorted view of fiscal policy. They attribute the double dip Eurozone recession (2011-13) to fiscal austerity, whereas it was actually caused by an extremely tight money policy at the ECB. Or they think the Great Inflation of 1966-61 was triggered by an expansionary fiscal policy, whereas budget deficits during the 1960s were actually quite small. And few people know that Japan’s long deflation (1993-2012) was accompanied by one of the most expansionary fiscal policies in all of world history (for a major peacetime economy):
Fortunately, Prime Minister Abe put an end to this fiscal madness when he took office at the beginning of 2013, and the Japanese economy has done better without the crazy levels of fiscal stimulus. (Ironically, some now want to try something similar to the Japanese fiscal expansion of 1993-2012 in the US, despite the deflationary outcome in Japan.)
The Economist has an article discussing the Japanese sales tax increase scheduled for this October:
Among the pledges Shinzo Abe made in 2012, as he started his second stint as Japan’s prime minister, was to double the sales-tax rate. At 5% it was low by rich-country standards, and Japan’s public finances, battered by years of deficits, needed shoring up. But having gone part-way, to 8%, in 2014, he has twice put off finishing the job for fear of choking off a tentative economic recovery. That increase is now scheduled for October, and he is loth to delay a third time—so much so that he has said that only “an event with the magnitude of the Lehman Brothers shock” would deter him.
Everyone agrees that a higher sales tax is needed, but they differ on the wisdom of a speedy move. The previous hike provoked a sharp downturn. Now fresh signs of economic weakness are leading to fears of a repetition.
As is often the case, this article presents a misleading picture of the effect of fiscal austerity. It’s not completely wrong; GDP growth did plunge sharply in the quarter immediately after Japan raised the national sales tax from 5% to 8%, but this was mostly due to Japanese consumers timing their purchases to avoid the tax. It had little to no impact on the labor market:
There are good arguments on both sides of the sales tax issue. I’d like to see them raise the tax to 10% in order to further reduce the budget deficit. But there’s also an argument that more tax revenue would merely lead to more government spending. On the other hand, it is not a good argument to claim that the tax increase would “provoke a sharp downturn.” The labor market did fine in 2014 and it would continue to do fine after an October rate increase, as long as the BOJ doesn’t bungle monetary policy.
Because Japan has a falling population, their trend rate of RGDP growth is very low. In recent years, the economy has occasionally experienced a negative quarter or two of GDP growth. But these random fluctuations are not “recessions” in any meaningful sense of the term, as the labor market is not affected, even if they are called recessions in the media.
If you look at the unemployment rate graph, you can see 4 actual recessions, in 1993, 1998, 2001 and 2008-09. In each case, the unemployment rate increased significantly. That did not happen in 2014. And the 1998 and 2001 recessions occurred despite highly expansionary fiscal policies. Contrary to the claims of Keynesians, fiscal stimulus is no cure for “secular stagnation”. And Abe’s policy of fiscal austerity has produced the strongest Japanese labor market in a quarter century.
We are told that voters hate inflation and hate tax increases, but Abe keeps winning landslide elections promising higher inflation and higher sales taxes.