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Japan Looks For Sales Tax Hikes

by Mary Swire,, Hong Kong

07 June 2011

After many hints and suggestions, and with its Prime Minister Naoto Kan under extreme political pressure, the Japanese government has disclosed a programme of consumption tax hikes to finance increases in social security spending.

Before the earthquake and tsunami in March this year, Kan had established an official panel to work on proposals to finance increasing social security outlays in Japan. He had then reiterated on a number of occasions that it was imperative to discuss reforms to the tax system, linked directly to providing the financial resources necessary to fund the rapidly-rising costs of pensions and health care.

It is reported that social security costs, including pensions and health insurance, are forecast to increase rapidly in the period to 2015 – by some JPY2.7 trillion (USD33.6bn) annually, from the JPY108 trillion (USD1.35 trillion) to be seen this year.

The panel also pointed to the necessity to provide additional tax revenue in order to achieve a targeted halving of Japan’s current fiscal deficit of 6.5% by 2015. However, the further target of obtaining primary balance by the end of this decade, will be left to possible action in 2016 and beyond.

The panel’s recommendation to the government is, therefore, that Japan’s consumption tax should be raised in stages, so as not to affect the country’s economic growth prospects. It is proposed that the current 5% tax rate should be increased to 10% in two stages by 2015, with the first hike in the next fiscal year from April 2012.

The tax increase is being put forward despite the government’s remaining nervousness of such a proposal, as a similar suggestion for doubling the tax became a major cause of its losing its majority in the parliamentary upper house last year. The outlook for reform has also been clouded further as Kan, in order to survive a recent parliamentary vote of no confidence, has said that he is prepared to resign after his government has laid the groundwork of reconstruction in the north-east of the country.

However, with all of the credit rating agencies now linking maintenance of the country’s ratings to the formulation of credible fiscal reform proposals, the government appears to accept it must provide some lead in this matter.

In fact, reacting to the recent decision by Moody’s to place Japan’s credit rating on review for a possible downgrade, Economy Minister Kaoru Yosano said that it showed the need for the government to take action to correct the country’s huge fiscal deficit, despite the difficulty it will experience in obtaining political and public acceptance.

Japan’s current fiscal position is also confused by the huge costs foreseen for reconstruction in the north-east of the country. If, within the government, it appears to be agreed that the government should use the additional consumption tax revenue to cover increasing social security costs, it can now be expected that reconstruction will have to be largely financed by further government bond issues and by debt purchases by the Bank of Japan, despite Japan’s public debt already reaching over twice its gross domestic product.

TAGS: tax | economics | sales tax | fiscal policy | tax rates | social security | tax reform | Japan

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