Prime Minister Shinzo Abe has indicated that his administration will put priority on economic growth as it weighs the road map for fiscal consolidation in the years to 2020. However, his reported emphasis on increased tax revenue through higher growth, while effectively ruling out further tax hikes, raises questions about the plan's credibility.
Abe promised to create the road map by this summer when he put off by 18 months the second phase of his consumption tax hikes in the face of a severe slump in consumer spending last fall. He said his administration remains committed to its goal of achieving a primary balance surplus — a condition where the government can pay for policy-related measures without incurring new debts — in 2020 even as it delays the consumption tax hike originally planned for this October. Last week, discussions for crafting the road map, which is supposed to present the specific path for achieving the target, entered full swing at the government's Council of Economic and Fiscal Policy.
When the council met on Tuesday, Abe said "no fiscal rehabilitation without economic growth" is the basic philosophy of his Cabinet's economic and fiscal policy management. That statement appears to underline the position often repeated by members of his administration that it won't sacrifice growth for the sake of fiscal consolidation. Behind this stance may be the hard lesson learned from the first hike in the consumption tax rate in 18 years in April last year. The jump to 8 percent resulted in a bigger than anticipated slump in consumer spending and plunged the economy into recession.