Options eyed for softening tax hike

Kyodo

The administration may line up several options before deciding whether to follow through on the first stage of consumption tax hikes next April, sources said Saturday.

Some of the options would change the timing or size of the increase, they said.

They will likely include the idea of gradually raising the 5 percent tax rate by 1 point a year, versus the shift to 8 percent in April and 10 percent in October 2015 as spelled out by the law enacted in August 2012.

The Council on Fiscal and Economic Policy is expected to invite experts to discuss the matter before Prime Minister Shinzo Abe makes his decision in the fall on the first stage, the sources said.

The experts could include his influential economic adviser Koichi Hamada, a professor emeritus of economics at Yale University. Hamada, who recently urged Abe not “to rush” into the tax hike, has suggested raising it by 1 percentage point, or by 2 points first and 1 point each time afterward.

Abe said Saturday that while the government’s midterm fiscal plan to be compiled in August will show a framework for cutting the deficit, it will not position the consumption tax increases as a done deal.

The fiscal plan “will not be something that would fix a hike in the sales tax,” Abe said at a news conference in the Philippines during his trip to Southeast Asia.

His remarks suggest that the fiscal plan will not show a detailed path for fulfilling the administration’s pledge to halve the ratio of the primary balance deficit to gross domestic product by fiscal 2015 from the level in fiscal 2010, although a sales tax hike is widely viewed as necessary to achieve that goal.

Abe stressed the administration will make a final decision on whether to raise the consumption tax to 8 percent next April after examining economic data due out in August and thereafter.

“We need to decide after thoroughly assessing economic conditions,” he said.

In a related development, the government has decided to take the unusual step of not capping ministries’ initial budget requests for the fiscal 2014 budget to be released in early August, in light of the decision to be made later on the consumption tax, other sources said.

Ceilings are usually set on general expenditures to limit requests, which would otherwise tend to grow. But now there’s a need to stay flexible as revenues can’t be projected until the tax hike is resolved, they said.

Instead, it might suggest in the budget guidelines that requests stay at levels similar to fiscal 2013, and specify numerical ceilings in the fall or later, when budget compilation gets into full gear, they said.

The guidelines will allow social security costs to rise to some ¥1 trillion in line with the aging of the population and seek a roughly 10 percent cut for public works and other programs.