On July 9, the government presented its fiscal projections for medium- to long-term analysis at this year’s 11th meeting of the Council on Economic and Fiscal Policy. In the analysis, they prepared two scenarios based on future total factor productivity, labor force projections and world economic trends. One is a baseline case, and the other is a high economic growth case. In the former, net annual growth of Japan’s gross domestic product is estimated at slightly more than 1.0 percent at the beginning of 2020s, while in the latter, GDP growth of 2.0 percent is projected.
The most shocking part of this report is that even in the more optimistic scenario, it is clear that the government can never realize its fiscal target of achieving a primary balance surplus by fiscal 2025 — even though the target year has just been pushed back by five years from fiscal 2020.
Japan is notorious for its huge fiscal deficit. The gross debt obligation of the national and local governments is almost 200 percent of the gross national product — the worst among developed countries, including Italy, whose corresponding figure is around 130 percent. It was said that when Greece went bankrupt in 2010, its debt-to-GDP ratio was around 130 percent and even at its worst the figure was still around 170 to 180 percent. It’s easy to understand how serious the Japanese fiscal situation is.
Since it was never realistic for the government to declare it would pay off its heavily accumulated debt nor even achieve a single-year fiscal surplus, officials began using the primary budget balance as an achievable target to improve the nation’s fiscal health. A primary balance shows how much a country’s tax revenue can cover its policy expenses with the exception of debt-servicing costs. Once a primary balance surplus is achieved and continues, theoretically at least, the total amount of debt will not increase. In 2010, the government said it would achieve a primary balance surplus by fiscal 2020 and endorsed that target as an international commitment.
Right after Japan set the fiscal rehabilitation target, however, it was hit by the Great East Japan Earthquake and tsunami of March 11, 2011, which devastated a broad area of the Pacific coastline in the Tohoku region. Since that time, a huge additional budget has been required for the reconstruction of the tsunami-ravaged areas. To make matters worse for fiscal discipline, the scheduled consumption tax hike to 10 percent was postponed twice by the second Abe administration, which took power in December 2012. The hike from 8 percent to 10 percent — originally scheduled to take place in October 2015 — was delayed first to April 2017 and then to October 2019.
By raising the consumption tax by 2 percentage points, it is estimated that slightly more than ¥5 trillion will be added to the government’s coffers. When the consumption tax hike was first decided among the three dominant political parties in 2012 (including the Liberal Democratic Party before its return to power), ¥4 trillion was supposed to be used to pay off debt and ¥1 trillion for social welfare expenses.
The Abe administration, however, suddenly declared prior to the general election last year that it would use ¥1.7 trillion on policy programs for the next generation such as free preschool education.
Because of these negative effects on fiscal discipline, the government has just pushed back the primary balance surplus target from fiscal 2020 to 2025. Last month, the government officially announced the Basic Policies for Economic and Fiscal Policy Management and Structural Reform 2018, which clearly mentions the change of the target year to fiscal 2025. But, in fact, according to the government’s calculations and estimates even under the optimistic economic growth scenario, the new surplus goal year appears to be just a pie in the sky.
What should the government do to put the brakes on this situation? An additional consumption tax hike could be one solution. In fact, some politicians and scholars are in serious discussions over an ideal consumption tax rate not only in terms of accomplishing the primary balance surplus but also paying off the entire long-term debt.
In my opinion, however, even though the plan may be right in theory, politically it seems almost impossible. The administration of Prime Minister Junichiro Koizumi, which lasted from 2001 to 2006 and whose approval ratings were historically high, could never touch the issue of consumption tax hikes. The second Abe administration, now in its sixth year, had to postpone the scheduled hike to 10 percent twice already. For lawmakers and political parties that have to face the verdict of voters at election time, a consumption tax hike, which would widely impact average citizens in critical ways, is a very sensitive issue.
Therefore I would like to propose the creation of a new tax for the next generation as an alternative to a consumption tax hike. The government should impose a 1 percent tax on the total cash holdings and deposits of households. This would be used to pay for expenses dedicated to the next generation, such as maintaining the public education and pension systems.
According to Bank of Japan data released in March, the total of financial assets held by households has grown to ¥1.829 quadrillion. And more than half of it — ¥961 trillion — is in cash and deposits. A 1 percent tax on such assets would ensure the government roughly ¥9 to ¥10 trillion — an amount equivalent to what would come in with a consumption tax increase of about 3.5 to 4 percent. A new tax on cash and deposits might also serve to stimulate personal consumption.
A 0.5 percent tax not just on cash and deposits but on all household financial assets would channel roughly the same tax revenue to government coffers. However, it could have a huge negative impact on financial markets (such as the stock exchange). Therefore it is not a realistic option.
Some might say the government could impose the new tax not only on financial assets but also on other household assets such as real estate. But forcing a family to make an additional ¥400,000 annual payment as the result of a 1 percent new tax on a ¥40 million house and land again is not a realistic option.
Since we are in a fierce international competition in which each country is reducing corporate tax to woo new investments, we can’t impose a new tax on businesses, either.
It is reported that the budget for fiscal 2019 will reach ¥100 trillion for the first time. If that could be avoided next year, it would only be a matter of time for the budget, which has been expanding steadily, to reach that level. I believe a new tax on household cash holdings and deposits is a realistic option for the future.
Ichiro Asahina is the chief executive officer of the Tokyo-based think tank Aoyama Shachu Corp.
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