Before hiking the 5 percent consumption tax, the government should first cut trillions of yen in public spending and adopt measures to spur economic growth, former economic and fiscal policy minister Heizo Takenaka says.
“Fiscal reconstruction cannot be achieved just by increasing taxes,” Takenaka, a professor at Keio University who served in the early 2000s as an adviser to then Liberal Democratic Party Prime Minister Junichiro Koizumi, said in an interview with The Japan Times on Jan. 6.
The 60-year-old economist said cutting government spending and spurring economic growth, for example by introducing greater flexibility and fluidity in the job market and lowering corporate taxes, should be at the top of Prime Minister Yoshihiko Noda’s to-do list for restoring Japan’s appalling public finances and avoiding a fiscal crisis.
The nation’s fiscal health is still sliding, mainly because social security costs are swelling at a rate of about ¥1 trillion every year as the population ages. The budget for fiscal 2008 came to about ¥83 trillion, but for the next fiscal year that starts April 1, it is expected to total around ¥93 trillion, a 12 percent increase.
The Democratic Party of Japan swept to power in the 2009 election on a pledge to drastically restructure the budget and eliminate about ¥16.8 trillion in public spending over four years. But the DPJ has so far made extremely limited progress in cutting costs.
While the DPJ-led government is unlikely to slash social security costs, Takenaka said it can still reduce the fiscal budget by reforming existing systems, such as by raising the minimum pensionable age and using taxpayer identification numbers to collect taxes more efficiently and crack down on evaders.
In addition, “abnormal economic policies” in recent years have hindered growth, Takenaka said., noting the Nikkei 225 stock average stood at 8,455 at the close of the last day of trading in 2011, nearly half of what it was when Koizumi exited in September 2006.
He also noted Japan’s weak performance in comparison to other countries since the global financial crisis in 2008. In the past three years, the Nikkei has dropped about 2 percent while in the U.S. the Dow Jones industrial average has risen about 46 percent. The leading bourse in Germany is up 34 percent and the London Stock Exchange is up 29 percent.
“What do these data mean? They mean Japan’s economic growth is well below average,” he said.
Economic policy started to stumble during the LDP-led administration of Taro Aso, but there has been little change since the 2009 Lower House election and the current DPJ government has continued to implement mostly short-sighted policies, Takenaka said.
The government so far has failed to reform the economy’s inefficient industrial structures, he said, citing as an example subsidies to help “zombie” companies stay afloat and maintain excessively high staffing levels.
As of September, domestic firms had 4.65 million more workers than they needed for the scale of their operations, according to Cabinet Office data.
The government meanwhile channels about ¥390 billion in subsidies to companies to enable them to send their workers on job-training programs or continue to pay employees forced into taking a leave of absence because market conditions deteriorated.
Takenaka argued that though such subsidies may appear on the surface to assist employees, in practice they prevent greater flexibility and liquidity from being injected into the job market, and as a result the workforce is unable to switch smoothly to industries with greater growth potential.
“I’m not talking about highly technical economic policies. This is just basic economics,” he said.
Noda’s government should also halve the corporate tax to 20 percent to send a positive message to companies and encourage them to expand their operations, he said.
Slashing the 40 percent corporate tax would also help spur more overseas companies to set up bases in Japan, he added.
“Fiscal reconstruction will only be achieved through economic growth (over an extended period) and restraints on spending to improve public finances. The additional revenue generated by raising the consumption tax would be limited and should only be seen as complementing” growth and cost-cutting measures, Takenaka argued.
He also laid into the government over its handling of the March 11 quake and tsunami and reconstruction efforts.
“In the case of the (1995) Great Hanshin Earthquake, the main supplementary budget (to fund rebuilding projects) was passed after four months. I think people should be more upset with the fact that it took eight months this time,” he said.
Takenaka and a number of experts recently published a book on the Great East Japan Earthquake titled “Lessons from the Disaster,” which comprises a number of analyses of the catastrophe and lessons learned in the area of crisis management. The book has also been published in English, and versions in Korean and Chinese are in the works.
In the book, Takenaka argues that the March calamities created an opportunity for the government to take bold action.
For example, the municipalities along Tohoku’s coast that were mostly — in some cases entirely — wiped out on March 11 by tsunami up to 15 meters high could be rebuilt as eco-municipalities with cutting-edge technologies, Takenaka said.
Making an entire municipality environmentally friendly is a very tall order because of the astronomical cost involved in scrapping existing structures and replacing them with green facilities, he said.
But the measures proposed so far by the Reconstruction Design Council, the government’s advisory body on rebuilding disaster-hit areas, are not aggressive enough, Takenaka said. But he remains hopeful that the Reconstruction Agency, which will spearhead rebuilding efforts in Tohoku, won’t shy away from drafting bold policies when it debuts next month, such as creating eco-towns and bolstering farmers against a future surge in imported produce.
“There are a lot of things that couldn’t be done before but we can do now . . . the economy has definitely been presented with opportunities for growth.”