Yielding to strong opposition from the ruling Democratic Party of Japan, the government of Prime Minister Naoto Kan, the DPJ president, approved a social security and tax reform plan Thursday that will enforce a 10 percent consumption tax “by the mid-2010s,” instead of its initial target of fiscal 2015.
The deal agreed on by Kan’s government and his DPJ also stipulates that the sales tax will only be hiked, presumably in stages, if the economy improves.
Despite the compromise, Kan hailed the agreement.
“I think today’s decision is a historic one,” he said. “(We) should move forward to reform the social security systems and tax so future generations will receive better social security services.”
The mid-2010s refers to a time frame “between 2014 and 2016,” said Kaoru Yosano, state minister in charge of fiscal policy and Kan’s point man on social welfare and tax reforms.
With social security expenses continuing to balloon, the government “has to make an important decision after 2015,” said Yosano, indicating the government envisions a further tax hike beyond that year.
The government’s initial plan to finalize the reforms by June 20 was postponed after the timing of the tax hike sparked fierce criticism from many DPJ lawmakers on the party’s tax reform panel.
The plan states that a tax hike is necessary to tackle mounting debt and social security costs as society rapidly ages. It also touches on the necessity of reducing social security outlays, including a hike in medical fees for patients aged between 70 and 74 to 20 percent from the present 10 percent, and also stipulates the need to lift the age people will start receiving pensions to between 68 and 70, up from the current 65 years old.
Meanwhile, the plan focuses on expanding the safety net for the young, such as by extending the pension system for regular employees to part-time workers.
The government’s Social Security Council estimates an additional ¥2.7 trillion will be required in fiscal 2015 if the reforms are implemented.
While some ruling bloc lawmakers criticized the tax hike plan, analysts welcomed the reforms, saying the country’s huge budget deficit and fears of a further downgrade of Japan’s sovereign debt rating make raising the consumption tax inevitable.
“It is important to show people how big a tax burden they will inevitably have to shoulder due to growing social welfare costs,” said Hideo Kumano, senior economist at Dai-ichi Life Research Institute.
Social security expenses are projected to increase to ¥47.4 trillion in 2015 from ¥32.7 trillion in 2010, according to the Social Security Council.
Katsuhiko Fujimori, manager and chief research associate of social policy at Mizuho Information and Research Institute, said, “The government has no choice but to raise the sales tax when the country is burdened with such huge debt,” adding the plan should have specified the timing of the tax hike. “It’s also important to make the social welfare system more substantial in the aging society,” he said.
The political vacuum created when Kan announced he will resign without specifying the timing of his exit is lowering confidence in Japan’s sovereign debt rating.
Moody’s Investors Service said last month it may downgrade the country’s sovereign debt rating due to heightened concerns about faltering growth prospects and a weak political response to the mounting public debt.
In calender 2010, Japan’s public debt reached 198.4 percent of the nation’s gross domestic product, according to the Finance Ministry, twice as high as the level in the U.S. and France.