The government must raise the consumption tax rate to 12 percent if it is to achieve a newly proposed fiscal discipline target, an official estimate showed Tuesday.
The government proposed the new target at a meeting of the Council on Economic and Fiscal Policy, a key economic policy panel. The target is less ambitious than earlier ones as a result of swelling public spending to cover social security costs and pay for stimulus packages to fight the recession.
The new target aims to achieve a surplus in the primary balance at both the national and local levels by the end of fiscal 2019, according to a released draft of the government’s annual fiscal policy guidelines due out later this month.
A primary balance surplus means expenditures, excluding debt-servicing costs, are covered by revenues without issuing new debt. The government earlier said it would struggle to reach the goal during fiscal 2011, which ends in March 2012.
The Cabinet Office separately released a set of estimates on possible scenarios for economic development.
In one of the scenarios, Japan could achieve a primary balance surplus in fiscal 2018 at the earliest, but only if the government raises the consumption tax by 7 percentage points to 12 percent.
If the rate is raised by only 5 points, another estimate showed, the government must wait until fiscal 2021 to achieve the goal.
A Cabinet Office official pointed out, however, that these are no more than estimates, suggesting it will be up to lawmakers to decide which option to take.
Focus is now shifting to how Prime Minister Taro Aso and the Liberal Democratic Party-New Komeito coalition will explain these estimates and a possible tax hike to voters ahead of a general election, which must be held by fall.
The government has said it needs to reform the tax system, and that such reforms must include studying the possibility of raising the consumption tax in fiscal 2011 should the economy recover.
The draft policy guidelines also refer to a separate fiscal goal of halving the ratio of the primary balance deficit to gross domestic product by the end of fiscal 2013.
For a longer-term goal, it says the government should work to prevent expansion in the ratio of national and local government debt to GDP by the mid-2010s and steadily reduce it starting around 2020.
Japan’s fiscal health has deteriorated as the government has increased spending to finance the social security system.
The government is also drawing large sums of money from state coffers to fight the recession.
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