The government plans to spend roughly ¥2 trillion in fiscal 2019 on measures to underpin consumer demand and alleviate the negative impact of the forthcoming consumption tax hike. Given that the economy went downhill after the consumption tax was last increased, from 5 percent to the current 8 percent, in April 2014, some steps will be necessary to shore up consumer spending when it rises to 10 percent in October next year. However, excessive fiscal measures to offset the impact of the tax hike can defeat the very purpose of the hike — to help rebuild the nation’s fiscal health and sustain the social security system. The government should stop and review the effectiveness of the planned measures and their fiscal cost.
According to an outline of the planned measures, the government will offer a 5 percent reward-point rebate to consumers for purchases made via cashless methods such as credit card, for nine months beginning when the tax increase takes effect in October. Although the rebate will not apply to payments made at large chain stores, it could effectively cut the burden on consumers even compared with before the tax hike if the reward points are used for other purchases. The measures will also feature shopping vouchers with enhanced purchasing power — for example, available for ¥20,000 but worth ¥25,000 when buying goods and services at local stores (with the gap to be covered at the government’s cost) — issued by municipalities for low-income households or families with children up to 2 years old. Cuts to automobile- and housing-related taxes will be on the menu as well.
The 2014 hike to 8 percent — the first raise in the consumption tax rate in 17 years — resulted in a sharp plunge in consumer spending that threatened to derail the nascent recovery of the economy. Prime Minister Shinzo Abe, whose administration’s public support has been buttressed by the good performance of the economy, has since twice postponed the planned second-stage hike to 10 percent, from October 2015 to April 2017 and then again to October next year. When Abe indicated last month he was going ahead with the hike in 2019, he vowed to take every step to prevent it from once again putting the brakes on the economy.
In fact, the additional burden on households in next year’s hike is projected to be much smaller than in the previous increase. The last hike from 5 percent to 8 percent is estimated to have increased the household burden by roughly ¥8 trillion. Initially, much of the roughly ¥5 trillion in fresh revenue from the hike to 10 percent was to be used for paying down government debt. But ahead of the snap election of the Lower House last year, Abe decided that nearly ¥2 trillion would be diverted to policy expenditures to finance free education for preschool children and other programs. Since the tax rate on daily necessities such as food and drinks will be kept at 8 percent, the effective new burden on households will add up to around ¥2.2 trillion.
In that sense, the meaning of the tax hike for fiscal consolidation may already be partially lost. Further large-scale fiscal spending to offset the impact of next year’s hike could raise the very question of why the consumption tax is being hiked. The planned measures may be temporary to absorb the shock of the tax hike, but if they prove effective in shoring up consumer demand for a while, there will be a sharp drop in demand when they are terminated.
The planned offer of reward-point rebates for cashless purchases is said to be aimed at promoting cashless settlements in this country, which lag behind many other advanced economies as well as China. But since the measure will be applied only on purchases at small and medium-size retailers, whose customers include local senior citizens, many of whom do not habitually use credit cards for their daily shopping, it’s not clear whether the step will have the intended effect. Many small local shops continue to shun credit card payments due to the commission fees they have to pay to the credit card firms. Doubts also persist over the effectiveness of shopping vouchers, which can be used only at shops within the municipalities that issue the vouchers, as a tool to spur consumption.
The total expenses of these and other fiscal measures in fiscal 2019 are estimated to roughly match the amount of the effective increase in the household burden from the tax hike. Since there will be no upper limit on the reward-point rebate, the system will likely benefit wealthy consumers more than poorer households since the former will spend more than the latter. Whether the measures are really worth the cost should be given close scrutiny.