The government has decided to dedicate revenue from the consumption tax toward financing rising pension, medical and other social security costs, according to sources.

The plan is aimed at gaining public support for raising the 5 percent tax, they said. A hike is considered necessary to reconstruct the government’s finances.

The government envisions beginning discussions on the proposal by presenting the plan to the Council on Economic and Fiscal Policy, the sources said.

It hopes to include the plan in a policy report on fiscal management and structural reforms to be compiled in late June, they said.

Social security costs borne by the central and local governments totaled some 26 trillion yen in fiscal 2004.

Experts say the consumption tax should be raised to more than 10 percent to meet those costs.

The government is expected to launch full debate on the plan late this year when it begins work on revising the tax system.

However, the details — including when and how much the consumption tax will be raised — aren’t likely to be discussed until after a House of Councilors election in July 2007, the sources said.

The government plans to study the types and scope of social security services to be financed by the consumption tax because this will influence how much the rate must be raised, they said.

In the policy report and elsewhere, the government plans to make clear that all revenue from the consumption tax will be passed back to the public through social services, they said.

The government will thereby call on the public to choose whether the tax will be raised to maintain the current levels of social services — or keep the rate as it is and lower social services.

Economic and Fiscal Policy Minister Kaoru Yosano instructed Finance Minister Sadakazu Tanigaki in April during a meeting of the economic council to study a stable revenue source for social security services.

Tanigaki is expected to present his conclusions on the consumption tax plan to the economic council after discussions with the Finance Ministry’s fiscal system panel, the sources said.

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