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Deficit cut mulled as sales tax debate intensifies

Bloomberg

The Abe administration is considering an ¥8 trillion target for budget-deficit cuts over the next two years as officials debate how to proceed with the planned consumption tax increases that threaten to take the wind out of the economic rebound.

The possible target is based on the assumption that the 5 percent consumption tax is raised as planned to 8 percent in April, according to two officials who asked not to be named per government policy.

Prime Minister Shinzo Abe’s administration plans to release its medium-term fiscal plans, and a final decision on the consumption tax, later this year.

With a report Wednesday showing little sign of the wage gains Abe needs to bolster his reflation campaign, policymakers face the challenge of reining in the world’s largest public debt burden without derailing growth. Economy policy minister Akira Amari said Tuesday that officials will huddle with “experts” on how to implement the tax hikes, which were enacted by the previous administration.

“It’s highly likely that Abe’s government will choose to lift the sales tax as planned,” said Akito Fukunaga, chief rates strategist in Tokyo at Royal Bank of Scotland Group’s RBS Securities unit, one of the 24 primary dealers in Japanese government securities. “The amount of ¥8 trillion underlines that the government has no other choice,” given the difficulty in finding other means to make up the deficit cut, he said.

Amari told reporters late Tuesday that “there is no option to not raise the consumption tax at all,” barring an external shock of a magnitude similar to the September 2008 global money-market breakdown. He said economic expansion may slow next year due to the levy, then rebound after that.

Expert-produced studies showing varying impacts on the economy from scales of tax increases could help policymakers determine how much of a supplementary budget is needed to counter the hit, according to Fukunaga. Economists estimate the need for a ¥5 trillion package, a Bloomberg News survey showed this month.

The legislation approved under the former government allowed a delay in the two-step tax increase, which would bring the rate to 10 percent in 2015, depending on the state of the economy.

Officials including Amari and Finance Minister Taro Aso have said the call will be made after the government’s second estimate of second-quarter gross domestic product, due Sept. 9.

Japan’s medium-term fiscal plan will be submitted to the Group of 20 nations meeting in early September, Aso said Tuesday. He told his G-20 counterparts at a July 20 gathering in Moscow that Japan will craft a credible framework.

Government debt will exceed 245 percent of GDP this year, according to the International Monetary Fund — the legacy of deficit spending and two decades of malaise that has sapped tax revenue.