Sales Tax Rise 'Will Not Solve Japan's Fiscal Problems'

by Mary Swire, Tax-News.com, Hong Kong

27 January 2012

In a study of fiscal trends in the country, the Cabinet Office has disclosed that the Japanese government would still not achieve its longer-term deficit reduction targets, even if its proposed consumption tax increases are able to be put into effect.

Despite the country’s burgeoning social security and pension payments, the Japanese government has previously promised to halve the country’s fiscal deficit over the period from 2010 to 2015, while achieving a primary surplus (net of interest payments on its debt) by 2020.

The currently-stated means of achieving those targets rest on consumption tax hikes from the present level of 5%, to 8% in April 2014, and then to 10% in October 2015. However, given those tax increases, and under conservative growth assumptions, the Cabinet Office has estimated that the deficit would remain at 3.3% of gross domestic product (GDP) in 2015, just missing the target of 3.2%, while, by 2020, it would still remain at some 3.1% of GDP.

In that case, the assumption is that Japan will require public spending cuts and further tax rises sooner rather than later, in order to achieve its budgetary gaols. The Cabinet Office has indicated that, if it is proposed to use only additional collections of consumption tax, a rate of 16%, rather than 10%, will be eventually necessary. The International Monetary Fund had previously suggested that a rate of 15% would be required.

After the release of the study, in his speech to the country’s parliament, Prime Minister Yoshihiko Noda reiterated his call for the opposition parties to join in talks to increase consumption tax. Even after finding it extremely difficult to obtain approval within the governing party to the tax hikes, involving defections and an element in the party remaining against the policy, Noda is still hoping to obtain the opposition’s agreement before budget legislation is required to be presented in parliament by the end of March this year.

However, the opposition, whose agreement is required before any fiscal measure can be approved, are looking to return to power, and have no intention of allowing the Japanese government to pass a prospective consumption tax increases through parliament, without first calling an early general election.

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