Taxing consumers reduces growth – still!

So, the Japanese prime minister Abe proposed a bastard-Keynesian program for getting Japan out of its stagflation, nick-named Abenomics. But because he still effectively thinks neo-liberally, the program included a consumption tax increase to “balance the budget” (while at the same time reducing corporate taxes, of course).

Bill Mitchell has predicted for past such actions that they would reduce economic growth and was right.

And, as was to be expected by anybody in touch with reality, this has happened again:

  1. GDP contracted by 1.7pc between April and June, after a revised 1.5pc expansion in the first quarter after a consumer buying binge ahead of the increase.
  2. This translates to an annualised contraction of 6.8pc, but was less than the 7.1pc economists were expecting following the VAT rise in April, so the Nikkei edged up 0.2pc.
  3. With the exception of flat growth in the last quarter of 2013, this is the first quarterly contraction in nearly two years.
  4. Household or private consumption, which accounts for about 60pc of the economy, fell 5pc.
  5. Household investment shrank by 10.3pc, business investment fell only 2.5pc.

This happens so reliably, and we have had so many “natural experiments” since 2007/2008 that one would think that this is accepted wisdom by now. Well, one would be wrong:

9. Abe wants to raise taxes again to 10pc next year but he faces criticism over the pace of his efforts to shake up the highly regulated and protected economy.

This entry was posted in austerity, belief systems, economic policy, macroeconomics, MMT, neo-liberalism. Bookmark the permalink.

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