The government is unlikely to meet its fiscal consolidation target even with the hike of the consumption tax rate from 8 percent to 10 percent on Tuesday.
The tax increase will help the government’s general-account tax revenue reach a record ¥62.5 trillion for fiscal 2019. But at the same time, its general-account expenditures are estimated to swell to ¥101.5 trillion for the year ending next March due to growth in social security and defense outlays.
As the government needs to keep relying on debt issues to cover ever-rising costs to cope with Japan’s rapidly aging society, it cannot achieve its goal of turning the so-called primary balance into the black in fiscal 2025 even with the 10 percent consumption tax, the biggest revenue source, and annual economic growth of at least 3 percent in nominal terms, according to a Cabinet Office estimate.
A primary balance deficit means a country cannot finance its annual government budget without issuing new bonds, even when debt-servicing costs are excluded.
The latest consumption tax hike, expected to raise tax revenue by about ¥5.7 trillion a year, is not enough if the government wants to realize not only a primary balance surplus but a stable social security system, some pundits said.
But Prime Minister Shinzo Abe already said in July that another hike in the tax rate “will be unnecessary over the next 10 years,” preventing the government’s Tax Commission from proposing more hikes in its midterm report released in September.
Spending on social security benefits is projected to rise from about ¥121 trillion in fiscal 2018 to ¥140 trillion in fiscal 2025, and to around ¥190 trillion in fiscal 2040. The country’s baby boomers will start to turn 75 in fiscal 2025.
“The consumption tax hike this time was like a drop in the ocean,” a senior labor ministry official said. “We have to draw a reform path beyond the tax hike.”
In September, the Abe administration launched a new panel on social security reform. However, it remains to be seen whether the administration will venture into the thorny issue of “painful” spending cuts.
“We’re not considering at all a cut in social security spending only from a fiscal perspective,” economic revitalization minister Yasutoshi Nishimura has said.