The fiscal 2019 tax reform outline approved by Prime Minister Shinzo Abe's ruling coalition features measures to alleviate the anticipated negative impact on consumer demand from the consumption tax hike to 10 percent next October, such as automobile and housing-related tax cuts. These and other steps taken by the government as it prepares for the next hike are aimed to avert a repeat of the last consumption tax hike in April 2014, when the hike from 5 percent to the current 8 percent caused a steep fall in private consumption and nearly derailed the nascent recovery. While some steps may need to be taken to ease the added burden on households to ensure a smooth implementation of the tax hike, heavy fiscal measures could raise doubts over the very purpose of raising the consumption tax.
In addition to the tax cuts, the government has already adopted a package of measures to underpin consumer demand, including the offer of a 5 percent reward-point rebate to consumers for purchases made via cashless methods such as credit cards, as well as shopping vouchers with enhanced purchasing power — whose costs will be paid for from state coffers. Altogether, the cost of these measures could offset a large portion of the additional revenue from the consumption tax hike.
The consumption tax hike is supposedly meant to help cover the ballooning social security expenses of the aging population and thereby contribute to rebuilding the nation's fiscal health. But of the estimated ¥5 trillion in fresh revenue from the hike, it has already been decided that ¥2 trillion — originally intended to repay government debts — will be diverted to policy spending such as financing free preschool education. In addition, the rate on daily necessities such as food and beverages will be kept at 8 percent so as to ease the household burden. All in all, the net increase in the burden on households is expected to be about a quarter of what took place with the last hike in 2014. If fiscal steps still need to be taken to offset the impact of the tax hike, questions may arise as to why the consumption tax needs to be raised now.