Facing a mountain of government debt and a future shortfall in social security
funding, Japan's new Prime Minister Yasuo Fukuda will be called upon to make
some tough decisions on tax policy, especially with regard to the politically-sensitive
issue of the consumption tax.
Before a succession of political scandals, an electoral reverse and a foreign
policy deadlock overtook former Prime Minister Shinzo Abe,
Fukuda said during a debate in Tokyo that a rise in the 5% consumption tax was
"inevitable". But, since Fukuda was sworn in as Japan's new Prime
Minister earlier this week, the leadership of the ruling LDP party has softened
its tone, with party Secretary General, Bunmei Ibuki ruling out any decision
on the matter in the immediate future during an interview on Thursday.
However, the LDP's new policy chief, former Finance Minister Sadakazu Tanigaki,
is in no doubt that Japan will have to face up to the fact that consumption
tax will have to rise if the government is to meet its future social security
obligations.
"We are not going to resort to the sales tax from the beginning, but in
the end I think we will conclude that it's best to finance the pension scheme
with the sales tax," he told Reuters.
With a debt equal to 150% of its gross domestic product - the highest in the
industrialized world - and a demographic timebomb ticking as Japan's working
population diminishes in comparison to the retired, tax and fiscal reform has
been a major priority for successive governments in recent years. However, agreement
on the measures needed has been hard to come by, and a decision on the consumption
tax, which is perhaps the tax with most scope to raise revenues, has been repeatedly
put off.
It is thought by economists that a government plan to boost its contributions
to the state pension fund by 2.5 trillion yen (US$21.6 billion) in 2009/10 could
be easily offset by a 1% rise in consumption tax. But even a relatively small
rise in the levy could prove very unpopular, and similar moves in the past have
contributed to the downfall of at least two Prime Ministers. Moreover, a devastating
defeat in elections to the upper house of parliament earlier in the year, when
the opposition Democratic Party, which opposes a hike in consumption tax, won
a substantial majority, has further hamstrung the government on the issue of
tax reform.
According to the IMF, increasing the rate of Japan's consumption tax would be less detrimental to growth and more equitable across
generations than other forms of tax-raising measures. The IMF has also urged
Japan to widen its tax base "given the size of the task at hand".
Some IMF Directors have, however, viewed the authorities' focus on expenditure
adjustments as "broadly appropriate at this juncture". But with the
government intending to balance the budget by 2011/12, some tough decisions
on taxation will have to be made in the months and years ahead, whatever the
political leanings of the party in power.
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