Abe trots out tax hike issue again before snap election to boost LDP chances

Proposal to divert funds to nonsocial security programs spurs criticism over fiscal sustainability

by

Staff Writer

The controversy over increasing the consumption tax won’t be unfamiliar to those who follow modern Japanese politics, as earlier proposals have proven unpopular with voters throughout the postwar years and have even doomed previous administrations.

But for Prime Minister Shinzo Abe, the tax issue has served as a very useful tool that has repeatedly helped saved his political life.

On Monday, the prime minister announced his intention to dissolve the Lower House and call a snap election for Oct. 22, saying he will seek a public mandate on how to spend the expected revenue increase from the planned 2019 consumption tax hike, which will rise from 8 percent to 10 percent.

This is the third time in just the last three years that his government has taken an arguably populist position over the controversial tax policy prior to a national election.

“I was concerned Abe could postpone the consumption tax hike for a third time,” said Takero Doi, professor of economics at Keio University in Tokyo and a noted public finance expert. “But this time, at least, he has clearly said the government will raise the tax rate from 8 to 10 percent, which is a good thing.”

In April 2014, the sales tax was raised from 5 percent to 8 percent, with a follow-up hike originally scheduled for the following year. On November 2014, Abe dissolved the Lower House for a snap election saying he would seek a public mandate to postpone the second tax increase from October 2015 to April 2017.

In June 2016, Abe again pushed back the rescheduled tax hike to October 2019, a month before an Upper House election.

Each time, Abe’s Liberal Democratic Party won a landslide victory, partly thanks to voter concerns over an increased tax burden.

Until Monday, the government was set to use about ¥4 trillion a year from the forecasted tax proceeds of around ¥5 trillion annually to reduce snowballing public debt.

But Abe now says he will divert about ¥2 trillion a year from the expected additional revenue for new education and social security programs, including free kindergarten and day care services for children ages 3 to 5 as well as assistance for economically disadvantaged young people seeking higher education.

This policy shift is likely to prove popular among voters and benefit Abe’s LDP in the upcoming election.

At the same time, it has significantly increased public concern over long-term fiscal sustainability for a debt-ridden Japanese government, whose liabilities have exceeded 230 percent of the country’s gross domestic product as of 2016. That is the worst among major developed countries, according to data provided by the Organisation for Economic Co-operation and Development.

During Monday’s news conference, Abe admitted the government would not be able to achieve its target of turning the primary budget balance into a surplus in fiscal 2020, citing his new spending policy.

A primary budget surplus means a condition in which the government can fully cover policy expenditures excluding debt-servicing costs with its own tax revenues.

Achieving this balance surplus in 2020 has been a key promise of Abe’s government to ensure investors’ confidence in Japanese government bonds.

Still, the prime minister said he would “never abandon” his goal of achieving fiscal soundness, without saying during the newsconference when that deadline would be.

Doi of Keio University praised Abe’s renewed commitment to fiscal sustainability. He added Abe should set a new target date “as soon as possible” to ensure public confidence.

The prime minister’s sudden policy change has also enraged some LDP members who have long maintained the consumption tax is the only viable way to pay down the

piling debt that has been accruing at a fast pace as a result of swelling costs for public services such as medical and nursing care as well as pensions.

“This is outrageous. Now, the government doesn’t have the funds to cover growing social security costs for an aging society,” former welfare minister Yuya Niwa said last week during an interview. At the time, media outlets had already reported the outline of Abe’s new spending plans.

Niwa pointed out the use of consumption tax revenue was strictly limited by law to social security programs, including those for medical, pension and nursing care services.

The law was later revised to allow the government to use some revenue to provide support for households with children. But Niwa, an LDP heavyweight who has exerted influence over government welfare policies for years, said use of the funds for higher education would not fall within this category.

According to Niwa, rank-and-file LDP members were kept in the dark while Abe and a small group of his aides decided on the policy changes.

“Are all the election promises decided only with the prime minister in mind?” Niwa asked. “If so, that’s a dictatorship.”

Defending his new policy, Abe emphasized during Monday’s news conference his spending policy is aimed at easing wide-spread anxiety among young people over raising children.

Indeed, many experts have pointed out government spending has been disproportionately focused on providing social security benefits for elderly people, with little going to benefit younger generations.

According to the OECD, Japan’s public spending on educational institutions accounted for just 3.2 percent of gross domestic product as of 2013, the second lowest among 33 countries with comparable data.

Masaki Kuwahara, a senior economist at Nomura Securities Co., agreed that the government should spend more to provide services to younger people.

But, he said, Abe’s policy shift does not reduce social security expenditures for the elderly either.

“You can’t see how the total expenditures will be curbed, which will have a negative impact on fiscal reconstruction,” he said.

Kuwahara said the government is probably trying to improve the quality of workers by allocating more funds to education with the belief that it will raise the nation’s economic growth rate over the long term.

“I can understand that idea. But the most important thing is quality of education (not quantity), ” he said. “Can we achieve quality education by allocating more funding? There has been no discussion on that question at all this time.”

Indeed, the prime minister has yet to explain in detail his new spending policy, including how much money will be allocated to various areas and what kind of education programs will be implemented.

Kuwahara said Abe probably rushed to churn out new policy ideas in order to call a snap election amid the latest North Korean crisis, which has pushed up the support rate for his Cabinet, according to media polls.

“So this policy talk has suddenly emerged,” leaving little time for Abe to hammer out details of his new plan, he said.