Prime Minister Shinzo Abe confirmed Tuesday that the government will raise the consumption tax rate from the current 5 percent to 8 percent from April 2014. He apparently believes that the Japanese economy is strong enough to weather the likely negative impact of the tax increase — an economic slowdown due to consumers tightening their purse strings — but there is no guarantee that things will go as he wishes.
Mr. Abe said in his statement that the consumption tax hike is necessary to make social welfare services sustainable. But measures the government is to take in connection with the tax hike are mainly aimed at beefing up support for businesses rather than helping out households. Given its track record, there is a strong chance that the government will rely on pork-barrel projects to stimulate the economy, which would defeat the very purpose of the consumption tax hike — the restoration of Japan’s financial health.
The central government’s accumulated debts have already topped ¥1,000 trillion. But the budget requests for fiscal 2014 reached a record ¥99.2 trillion and the government will likely increase public works spending. Unfortunately such a course of action will increase government debt but do little to strengthen the economy. Households will be hit hard not only by the consumption tax increase but also by rises in the cost of electricity, city gas and food attributable to the cheap yen policy being pursued by the Bank of Japan in accordance with Mr. Abe’s economic policy.
Households are also facing higher costs for medical and nursing care services, higher pension premiums and a reduction in pension benefits. The Abe administration has already slashed core benefits for welfare recipients.
Mr. Abe’s goal is the expansion of the Japanese economy, but a slowdown might take place instead as households tighten their purse strings in response to these increased financial burdens. People in the Tohoku region who have been hit hard by the 3/11 disasters in particular will face hardships. Many small and medium-size businesses will also likely experience great difficulties because they will be unable to pass increased tax burdens onto their customers, which include both consumers and large businesses.
The Abe administration’s policies are already causing many people to expect great difficulties. In the field of social welfare, for example, the government plans to exclude elderly people who need less care from services under the nursing care insurance system and force them to use municipal services. It is also going to limit the number of elderly people who can enter special nursing homes, increase out-of-pocket payments by people aged 70 to 74 for medical services from the current 10 percent to 20 percent of the cost, and raise pension premiums for corporate workers, the self-employed and the unemployed.
When the Democratic Party of Japan government led by Prime Minister Yoshihiko Noda pushed legislation to raise the consumption tax, the catch phrase was “unified reform of social welfare and the tax system.” The Liberal Democratic Party and Komeito cooperated with the DPJ to pass the legislation. But Mr. Abe’s Tuesday statement does not contain any specific program designed to strengthen and stabilize Japan’s social welfare system. If he had included a concrete program showing how much money raised through the consumption tax hike would be used to improve specific social welfare services, the public would better understood the need to raise the consumption. As things stand, many people feel that they are forced to bear the increased burden from the tax hike — which is expected to amount to about ¥8 trillion a year — without receiving any benefits in return.
As part of ¥5 trillion in measures to be taken in connection with the consumption tax hike, the government will give ¥10,000 to ¥15,000 to every member of low-income households that are exempted from paying the residential tax plus subsidies of up to ¥300,000 to home buyers. Much of the ¥5 trillion will be spent on public works projects and reconstruction of areas hit by the 3/11 disasters. As part of the measures, the government is also considering abolishing the surcharge added to the corporate tax to help fund the reconstruction of disaster-hit areas at the end of fiscal 2013, one year earlier than originally planned. A form of pork barrel, these measures will greatly contribute to strengthening the power base of the ruling parties.
The government is also pushing tax cuts amounting to ¥1 trillion. Most of the cuts will be used to promote equipment investment by companies and to reward companies that raise workers’ wages. But we wonder how many companies will increase equipment investment when wages are not increasing and overall consumption is not particularly strong. We also wonder whether companies are financially strong enough to raise wages. Mr. Abe said he is considering lowering the effective rate of Japan’s corporate tax, but there is no guarantee that it will lead to increased employment and higher wages. Companies may simply decide to funnel the tax cut savings into their internal reserves.
The government’s measures and Mr. Abe’s statement on the corporate tax show that his administration has deviated from the premise that the consumption tax hike must go hand in hand with measures that make Japan’s social welfare system sustainable to relieve people of anxiety about their retirement years.
Unfortunately there is a real possibility that the consumption tax increase, combined with higher prices due to the cheap yen, will cause an economic downturn, thus increasing Japan’s financial difficulties rather than reducing them.