The Cabinet Office on Sept. 9 revised upward gross domestic product growth for the April-June period. Encouraged by this, Prime Minister Shinzo Abe appears poised to raise the consumption tax rate from the current 5 percent to 8 percent from April 2014.
But his administration must answer many questions related to the consumption tax raise.
On Aug. 12, the office said that GDP in real terms increased 0.6 percent in the April-June period from the previous quarter, for an annualized 2.6 percent. It now has raised the figures to 0.9 percent and 3.8 percent, respectively.
A government source said that the figures were so good that it is difficult to find a reason not to raise the consumption tax rate. But people are not feeling that the economy is in a good shape. Workers’ wages are not rising while energy and food prices are rising owing to the cheap yen policy of the Bank of Japan.
The Cabinet Office’s business watcher survey shows that the diffusion index in August declined 1.1 points from July — a drop for five consecutive months. The growth rate of consumer spending for the April-June period was revised downward from the preliminary 0.8 percent to 0.7 percent.
While the purpose of raising the consumption tax is to help reduce the central governments’ outstanding debts, which have topped ¥1,000 trillion, and to make the nation’s social welfare system sustainable, the Abe administration is not dealing with the issues seriously.
The budget requests for fiscal 2014 reached a record ¥99.2 trillion, with the government leaning toward increasing public works spending. Clearly the Abe administration is not serious about eradicating wasteful use of public money to restore financial health. In fact, the Cabinet Office raised the growth figure for public works spending in the April-June period from the preliminary 1.8 percent to 3.0 percent. Increased public works spending will do little to strengthen the Japanese economy.
The government said that the increased revenue from the consumption tax will be used for social welfare programs. But the tax is a regressive tax, putting more of a burden on the poor than on the rich. The government should consider other ways to increase state revenues, including higher taxes for the rich.
Although the government said that the consumption tax increase will go together with social welfare reforms, the Abe administration seems eager to burden the weaker members of society by reducing the core benefits for people on welfare.
It has not yet come up with a convincing reform plan designed to lessen worries about people’s lives in the future.
The Abe administration says that it will use two-thirds of the revenue from the 3 percent increase in the consumption tax to mitigate undesirable economic effects from the tax raise. If the money is used for public works projects and reduction of the corporate tax, it will not help improve people’s lives. There is no guarantee that a corporate tax cut will increase employment. Companies may use available money to increase their internal reserves or investment overseas.
Unless the Abe administration changes its basic orientation in its economic policy, people will not support its move to raise the consumption tax.