Tax hike alone won’t cure fiscal ills

With the consumption tax rate raised from 5 percent to 8 percent on April 1, attention is focusing on whether the economic uptrend can survive the increased burden on households and the expected falloff in consumer spending. But it also needs to be closely watched whether the tax hike — the first of a planned two-stage increase that would eventually raise the tax rate to 10 percent from October 2015 — will be matched by other efforts to improve the nation’s dire fiscal conditions and ensure the sustainability of its social security systems.

The first hike in the consumption tax in 17 years comes just as prices are rising under Prime Minister Shinzo Abe’s quest to end the state of deflation that has plagued the economy. It is estimated that the tax hike plus the higher costs of imports and utility charges due to the weak yen will raise the financial burden on households by an average 4 percent. Although some leading firms with improved earnings have given employees their highest raises in years, the overall wage increase for the nation’s workforce is unlikely to cover rising costs.

While consumer spending is estimated to have picked up in the last quarter as people rushed to buy ahead of the tax hike, the anticipated slump in consumption starting this month is widely forecast to put the nation’s economic growth in negative territory in the April-June period.

The Abe administration says it’s ready to mobilize policy measures — including front-loading of government spending for fiscal 2014 — to keep the recovery from losing steam. The prime minister is supposed to decide by the year’s end whether to go ahead with the second phase of the tax hike by monitoring the course of the economy in the coming months.

Despite concerns about the negative effects of the consumption tax raise, the government says the tax hike is necessary to cover rising social security costs and rebuild the fiscal health of the nation, whose debts have climbed to the worst level among industrialized economies.

By law, all the additional consumption tax revenue is to be used on social security programs such as pensions, medical services and nursing care. While a 3 percentage point hike in the tax is estimated to generate ¥8.1 trillion a year, the revenue increase in fiscal 2014 is expected to be ¥5.1 trillion due to the gap in government and business accounting years.

But the tax hike does not necessarily translate into improved social security services. In fact, only 10 percent of the revenue increase will be spent in fiscal 2014 on expanding the services, including some ¥300 billion budgeted for building day-care facilities for children. Much of the remainder is to be used to cover part of the funding shortfalls in existing programs that had earlier been covered by government debts.

The government’s social security expenses continue to rise by roughly ¥1 trillion each year because of the rapid aging of population and topped ¥30 trillion in the fiscal 2014 budget. The consumption tax hike was supposed to be coupled with fundamental reforms of the welfare programs to cut expenses, but such efforts are lagging.

Since the consumption tax was last increased in 1997, the government debts have tripled to top ¥1,000 trillion. The Abe administration has implemented aggressive fiscal spending in its bid to end deflation and put the economy on a recovery path. Ostensibly to contain the negative impact of the tax hike, the government in February implemented a stimulus package, including public-works projects, that amounted to more than the estimated increased in tax revenue. The government budget for fiscal 2014 also reached a record ¥95.88 trillion. Apparently fiscal discipline is not this government’s priority.

The consumption tax hike alone obviously will not resolve the nation’s fiscal and social security woes. It needs to be matched not only by reforms in welfare programs but also by efforts to rein in government spending.

  • The problem with Japanese public administration was always the right of govt to subvert the property rights of constituents. There is no ‘spending crisis’. It was always the systematic abuse of tax payers who live under the collectivist illusion that public funding achieves some benefit. The idiocy arises from:
    1. Economies of scale – the belief that public goods can be shares. Of course they can, but so can private goods. Moreover you have the discretion to choose what is personal and what is shared.
    2. Opportunity cost – The idea that any public good is a bonus because I the taxpayer does not have to pay for it. This is another illusion arising from the prospect that the alternative proposition is you, the taxpayer, having to pay for it all. This is clearly not the case, and public funding with no counterparty accountability or even ‘skill’ or requirement for efficacy, is destined to leave you short changed. The challenge to public funding is not to provide the taxpayer with ‘any gain’, but far more ‘economic surplus’ than the taxpayer paid out in tax.
    There is a reason why tax was first applied to the wealthy only. It was to extort influence over the mob. Now, we have an extortion racket with ambivalent means and ends, as everyone seeks to circumvent it; but too few the moral conviction to change it. Libertarianism, where it is found, it a rare advocate of political reform, and yet most libertarian parties are ‘conservatives for small govt’. Only in NZ is there the foundations for a true libertarian party at the national level. That’s the ACT Party. Why? Because there is another Conservative Party (for small government). NZ is one of the few countries with an MMP electoral system that gives standing to the smaller parties. It is one avenue for political reform under an illegitimate political system.

  • Daishi88

    “and not the willingness of the U.S. to invest in Japan, give it special access to the U.S. market, and pay for its defense for the past sixty years”

    I was just pointing this out to a guy on another trying to declare that Japan is a shining bastion of racial purity in the world. It took me a while to realize it myself, but it’s still amazing that people seem so intent on ignoring how much cultural diffusion has already happened here and how deeply interconnected Japan already is with the world