Experts: 10% tax too minor to dent deficit

To get ball rolling now, administration puts off heftier hikes for a later day


Staff Writer

The Cabinet on Friday made good on its vow and moved forward on doubling the consumption tax by 2015, but some experts and lawmakers already see it as only a tiny step in cutting the ever-expanding fiscal deficit.

“It is obvious that further tax hikes are required beyond 10 percent,” said Kazuhiro Yoshii, managing director of the legal and tax research unit at Daiwa Institute of Research. “There is a bit of concern that they failed to clearly state (in Friday’s bill) when they will work on” further tax increases, he added.

The bill approved Friday by the Cabinet for submission to the Diet aims to increase the 5 percent sales tax to 8 percent in 2014 and then to 10 percent in 2015. Raising the consumption tax by 1 percentage point would generate an estimated ¥2.5 trillion in additional income.

Most economists, however, agree a 10 percent consumption tax rate isn’t nearly enough to cut the debt, which exceeds 200 percent of the nation’s GDP. It also falls short of covering for the health and welfare payments as a result of the rapidly aging population, they say.

Even those pushing for the current bill say 10 percent is just the starting point.

“If we are to use the consumption tax to pay for reform of social security and pension payments, a further hike is a possibility,” Prime Minister Yoshihiko Noda said during a speech at Keio University in February.

Deputy Prime Minister Katsuya Okada also said earlier this year that an “additional tax hike is obviously necessary” to pay for a fundamental overhaul of the pension system.

At present, social security costs are ballooning by about ¥1 trillion a year as the population ages.

Forecasts released by the government show Japan’s low birthrate will cause the total population to shrink 30 percent by 2060. People aged 65 or above will come to comprise 40 percent of the populace, meaning health and welfare payments are likely to skyrocket in the coming decades.

The burden will only add to Japan’s already unbalanced fiscal spending. The government intends to cover a record 49 percent of the general spending in fiscal 2012 with government bonds. Bond issuance will exceed tax revenues for the third year in a row, meaning the debt will continue to grow.

The health ministry recently calculated that if the ruling Democratic Party of Japan reforms the public pension system in line with its draft plan, which envisages a basic pension payout to increase benefits for low-income households, the consumption tax would have to be raised to 17.1 percent by 2075 to cover the costs.

Some economists go as far as to say pushing the tax into a range of 20 to 25 percent would be required to dig Japan out of its fiscal disarray.

But internal DPJ strife resulted in the Cabinet scrapping a clause from the bill Friday that called for increasing the consumption tax beyond 10 percent in the coming years.

Finance Minister Jun Azumi on Thursday reiterated that removing the clause shouldn’t be taken as a sign that the administration is backing down from its efforts to restore fiscal balance.

With some people fearing that Japan’s credit rating may see further downgrades unless lawmakers commit to stemming the soaring debt, Azumi went on to say that raising the tax “is an inevitable task for anyone running the government.”

With the Cabinet approving the bill, the next step for the DPJ will be to unite its members, including veteran Ichiro Ozawa, who have been vocal in opposing the tax hike.

Getting the bill through the Diet will also require that the DPJ fend off the opposition parties, which could have Prime Minister Yoshihiko Noda calling a snap election in exchange for their support.

Even if the administration can steer the bill over these hurdles, it will then find itself at a new starting line — where it will have to begin work on raising the consumption tax to a level where it will actually be effective.

“I can give credit to the Cabinet for keeping its deadline and approving the bill within the month,” Daiwa Institute of Research’s Yoshii said. But the expert added that some of the details, including how it says the government should “aim” for 2 percent economic growth in real terms for the decade through fiscal 2020, could stand in the way of applying the tax increase as planned.

“There is still some concern whether the tax hike will be carried out smoothly,” Yoshii said.

Stopgap budgets passed


The Diet passed a ¥3.61 trillion stopgap budget to cover public spending for the first six days of April, the first such measure in 14 years, after the ruling and opposition parties failed to agree on a full 2012 budget in time for the start of the new fiscal year Sunday.

Opposition parties have refused to vote on the ¥90.33 trillion initial budget for fiscal 2012 at the Upper House, where they hold a majority, calling for more time to deliberate the draft general account budget.

But after the Lower House, which is dominated by the ruling Democratic Party of Japan, passed the stopgap budget in the morning, the House of Councilors followed suit later the same day.

The Diet passed another stopgap budget worth ¥9.3 billion for urgent postdisaster reconstruction work in Tokohu, including decontamination of areas affected by radioactive fallout from the nuclear crisis, and clearing away debris and rubble in tsunami-hit municipalities.

The Upper House is expected to vote against the bigger initial budget next Thursday, but it will still enter into force the same day based on constitutional procedure, lawmakers said. The Lower House already approved the budget earlier in the month.

State spending on reconstruction efforts in the northeast are handled using a special budget account.