Prime Minister Shinzo Abe announced Tuesday he will raise the unpopular consumption tax from 5 to 8 percent on April 1 as scheduled, breaking a powerful political taboo.
At the same time, Abe unveiled a ¥5 trillion stimulus package to offset some of the immediate negative effects of the tax hike, including a ¥10,000 cash allowance for low earners and various tax cuts totaling about ¥1 trillion, including temporary ones, as well as ¥730 billion in tax incentives to encourage corporate investment.
The tax rise is expected to increase government revenues by ¥5.1 trillion in the next fiscal year, according to media reports.
“I have made the decision to raise the consumption tax rate on April 1, 2014, from 5 to 8 percent to maintain confidence in the country and hand over sustainable social security systems to the next generations,” Abe told key Cabinet ministers and members of his ruling Liberal Democratic Party on Tuesday afternoon.
Abe also said he believes that the ¥5 trillion package will “mitigate” the higher levy’s negative impacts, and that the economy will not stray from its current track toward long-awaited recovery.
Many previous Cabinets wanted to raise the sales tax to curb Japan’s dizzying fiscal debt but had to eventually give up amid strong opposition from voters.
Abe is riding high approval ratings in media polls at present and the fiscal crisis is looming ever nearer. Next year’s hike in the levy will be the first in 17 years.
Fiscal experts welcomed Abe’s decision as the first step in tackling the government’s mountain of debt. But they also argued the unpopular tax should be raised even further to avoid a possible fiscal implosion as social security costs continue to snowball.
“Japan has been unable to raise the consumption tax since 1997. . . . I appreciate (Abe’s) decision,” said Takero Doi, a professor and expert on fiscal issues at Keio University.
Doi said Abe’s decision underscored the fact that the public has finally reached a national consensus that the government needs to jack up taxes one way or another to tame ballooning social security expenditures.
Previously, many politicians and experts have argued administrative reforms — such as cuts in public works and personnel costs — would be enough to avert a fiscal crisis. But an apparent majority of the public no longer believes this is sufficient, Doi claimed.
Doi at the same time warned that Abe’s decision is far from a long-term solution. To curb public debt to a sustainable level, the government should raise the consumption tax to at least 15 percent, and possibly to more than 20 percent, Doi said, echoing the opinions of many mainstream fiscal experts.
“Otherwise, it will be hard for Japan to maintain fiscal soundness, sustainable social security systems, or even economic growth,” Doi argued.
Doi noted that, politically, Abehas been fortunate.
The previous government, led by Yoshihiko Noda of the Democratic Party of Japan, enacted a law, with the LDP’s support, to oblige the government to raise the levy unless the economy considerably deteriorated. The April hike would be followed by a raise to 10 percent in October 2015.
All Abe had to do was ratify the Noda government’s decision at a time when the economy seems to be showing signs of a badly needed economic recovery and when he is enjoying high approval rates.
“If Abe had failed to raise the levy, (people) would have started suspecting that no government could do it,” Doi said.
The LDP suffered a severe election setback after it introduced the then-3 percent sales tax in 1989, and another loss after the levy was hiked to 5 percent in 1997. Both actions proved to be political minefields.
Abe and the LDP may also face a voter backlash once consumers feel the pain of shelling out more for their purchases after April 1.
“We can never make any mistake” on decisions related to the consumption tax, said a close aide to the prime minister.
Abe, however, has already drawn criticism that he is prioritizing big corporations before ordinary consumers.
In hammering out the stimulus package, Abe and the LDP proposed to end special corporate tax surcharges for reconstruction in disaster-hit Tohoku a year earlier than planned and thereby boost the broader economy. This step would save firms a projected ¥900 billion in total.
On the other hand, tax surcharges for ordinary individuals will continue unabated for years.
Abe has been sensitive to requests from foreign investors, and has repeatedly floated the idea of cutting the corporate tax to attract more foreign business investment. But New Komeito, the LDP’s junior coalition partner, opposes the idea. Unable to reach agreement, the two parties merely agreed Monday to revisit the proposal by year’s end.
To win over New Komeito, Abe’s Cabinet has argued a corporate tax cut would help companies to raise wages, which would in turn benefit workers. But New Komeito, and many economists, don’t buy this notion.
“You can’t guarantee that companies would raise wages even if the (surcharges) are ended one year earlier. It’s just wishful thinking,” Makoto Nishida, director general of New Komeito’s tax issue panel, said Monday.