The consumption tax will have to rise to 22 percent from the current 5 percent by fiscal 2015 if the government is to achieve a sound balance between tax revenues and outlays, unless major spending cuts are made, an advisory panel to the finance minister said Monday.
For the government to put its fiscal house in order without any tax hike, it would have to slash its general-account expenditures by 26.9 trillion yen by fiscal 2015, the Fiscal System Council said in a report on the nation’s long-term financial outlook.
The panel recommended that Japan take a middle course between relying solely on a tax hike and making only cuts, saying, “A sharp outlay cut would undermine the people’s daily lives and the government’s functions.”
The panel called on the government to raise the consumption tax in tandem with spending cuts, thereby lessening the severity of both. “Reforms need to be implemented on both the revenue and expenditure fronts,” the report says.
Finance Minister Sadakazu Tanigaki received the document from the panel and plans to submit it to a meeting Wednesday of the Council on Economic and Fiscal Policy, chaired by Prime Minister Junichiro Koizumi.
The panel made the recommendations based on the budgetary adjustments necessary if Japan is to achieve a primary fiscal balance — with tax revenues sufficient to cover expenditures other than debt-servicing costs — and generate a surplus in fiscal 2011, and to raise the surplus to 1.5 percent of gross domestic product by fiscal 2015.
The projection assumes average nominal GDP growth — which impacts tax revenues and social security contributions — of 3 percent, and long-term interest rates, which affect bond-servicing costs, averaging 4 percent over the period.
Thus, to straighten out its books without reducing tax allocations to local governments, the central government would have to boost tax revenues by 45 percent, equivalent to a rise in the consumption tax to 22 percent, the panel warned.
If Japan chooses this route, it would have to jack up the consumption tax to 15 percent by fiscal 2011 and 22 percent by 2015. If, on the other hand, the state wanted to achieve the same 1.5 percent surplus without raising taxes, it would have to slash discretionary spending — all spending other than social security outlays, tax allocations to local governments, bond-servicing costs and civil servants’ salaries — by 68 percent.
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