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Monday, Jan. 20, 2003

JAPANESE PERSPECTIVES

Hike in consumption tax center of lobby's vision


The Japan Business Federation (Nippon Keidanren) on Jan. 1 released a grand vision aimed at reviving Japan into a vigorous and attractive nation.

Nippon Keidanren's predecessor, the Japan Federation of Economic Organizations (Keidanren), released a similar policy report in 1996 under the leadership of then chairman Shoichiro Toyoda, but many of the proposals spelled out in the earlier report have yet to materialize.

The new vision encompasses prospects for Japan's revival in the 21st century, and steps, including an increase in the consumption tax, that would help realize this goal.

The vision is based on basic principles spelled out by Nippon Keidanren Chairman Hiroshi Okuda at the organization's general assembly in May 2002, and paints a picture of where the country should be in 2025.

It contains specific proposals to turn Japan into a country whose population can enjoy new forms of growth and wealth -- and a country that people from around the world would like to visit and live, work and invest in. It also sets out guidelines for action to realize necessary reforms.

One of the key ideas included in the vision is that growth in the new era must be achieved under a self-sustainable system led by the private sector, and grand designs for economic, fiscal and social security reforms are set forth accordingly.

Even if the graying of the population continues, reforms in social security systems and the government's fiscal structure will still make it possible for the nation to achieve 3 percent annual GDP growth in nominal terms, or a 2 percent growth in real terms, on average through fiscal 2025.

To maintain social security programs such as health insurance and the pension system, a reduction in benefits will be essential, but that alone will not be sufficient. In securing the financial resources to cover the programs, the government has so far tended to turn to the younger generation and the corporate sector, where it has been relatively easy to seek cooperation. However, it should start utilizing the consumption tax, whose burden is shared broadly by the entire population.

Of course, there are conditions that must be met before the consumption tax rate is raised. Government outlays at both the national and local levels must be reviewed to cut back on wasteful expenditure. This must be pursued before the government asks taxpayers to shoulder greater burdens.

In a rapidly globalizing economy, in which human resources, money, goods and information move freely across national borders, the tax system should focus more on people's spending than on income. The huge budget deficits of national and local governments in Japan are not just the results of wasteful spending or the economic slump, but are attributable to the relatively low consumption tax, currently 5 percent. The average rate of equivalent taxes in other Asian countries is 10 percent, while that in Europe is nearly 20 percent.

Nippon Keidanren's new vision proposes that the consumption tax rate be hiked by 1 percentage point each year from fiscal 2004 through 2014, thus raising the rate to 16 percent in the final year. This, coupled with greater efficiency in spending and efforts to cap pension benefits and medical costs, will eliminate the deficit in the primary fiscal balance, thereby ensuring sustainability in the social security system.

While raising the consumption tax, special considerations will become necessary, such as introducing lower rates on daily necessity goods as well as the introduction of an invoice system.

The release of the vision has triggered active discussions in political and business circles on the possibility of a consumption tax hike. We believe the government should not avoid discussing the consumption tax issue and that this is a good chance for the entire nation to thoroughly debate what is needed for the future.

Yoshio Nakamura is a senior managing director of the Japan Business Federation (Nippon Keidanren).


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