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Tuesday, Nov. 6, 2007
FISCAL REFORMS IN JAPAN
Sales tax hike economic cure or curse?
Policymakers have waged heated debate in recent months over how to reduce Japan's mounting fiscal debt as the yearend deadline for compiling the government's next fiscal year budget nears.
Prime Minister Yasuo Fukuda's government is seen leaning toward a consumption tax hike. His predecessors — Shinzo Abe and Junichiro Koizumi — had ruled out this option as they focused on other policy matters, and Koizumi in particular tried to rein in state spending.
Following are questions and answers regarding fiscal reform:
How bad is the country's fiscal deficit?
The debt snowballed during the 1990s because the government issued huge amounts of bonds to finance public works projects to prime the economic pump after the burst of the asset-inflated bubble economy.
Now the outstanding national debt is expected to reach ¥547 trillion by the March 31 end of the fiscal year. This means a ¥4.28 million debt per capita.
It is ballooning every year due to the interest on the government bonds and increasing social welfare spending amid the aging population.
Particularly in 2009, the state's financing of the basic pension program is scheduled to rise to half from the current one-third.
The rest is financed by premiums.
The government is facing increased pressure to break the vicious circle.
Has the government ever taken debt-reduction steps?
Yes. Koizumi restricted public works projects to limit the issuance of new government bonds, and his successor, Abe, followed suit.
Instead of building unneeded bridges and highways, they promoted structural economic reforms.
As a result, the amount of new bond issues decreased for three consecutive years to ¥25.4 trillion in fiscal 2007 from ¥35.5 trillion in fiscal 2003.
But many lawmakers say the government has to take more measures to pull the country out of its debt quagmire.
Hidenao Nakagawa, Liberal Democratic party secretary general under Abe, and Heizo Takenaka, economic and fiscal policy minister under Koizumi, and other lawmakers are calling for stronger measures to support economic growth and thus a rise in tax revenue. But they have yet to propose specific measures to shore up the economy.
They also say the government has to slash wasteful spending by streamlining the bureaucracy and curbing public works project costs, which are often much higher than market prices, due, critics point out, to rampant contractor bid-rigging.
What about increasing taxes, including the consumption levy?
Kaoru Yosano, head of the LDP's fiscal reform panel, says those who think economic growth is the solution are too optimistic and the country has to sharply raise the consumption tax in the near future.
But critics feel this move will further curb consumer spending.
They say the already matured economy has little scope for further growth especially in the face of a decreasing population. Even reduced state spending would also probably be limited due to rising social welfare outlays.
According to the health ministry, social welfare costs ran ¥82.8 trillion in fiscal 2006 and are expected to increase to ¥143 trillion in fiscal 2025.
Last month, the Cabinet Office calculated that the government will have to raise the consumption tax to 17 percent by 2025 from the current 5 percent to cover mounting welfare expenses.
Just a hike to 6 percent would translate into ¥2.5 trillion in revenue.
Advocates of economic growth are against those lawmakers stressing a tax hike, arguing that just planning a tax hike in itself would discourage the government from pursuing other avenues to shrink the deficit.
Why has it become a hot topic with lawmakers recently?
It is now a hot topic because no election is looming.
Politicians, in order to not alienate voters, had specifically avoided tax reform debate in the runup to the July Upper House poll.
When the government introduced the consumption tax in 1989, it was 3 percent. When the LDP-led government hiked the levy to 5 percent in 1997, the party experienced a crushing defeat in the subsequent Upper House election.
Koizumi deliberately refrained from raising the issue of tax hikes during his stint. Abe, who took over the government in September 2006, vowed to avoid the issue until this fall, well after the July Upper House poll.
Following his predecessor, Fukuda promised to continue efforts to shrink the budget deficits. But he admitted the need for a tax hike in the future because of the growing social welfare spending.
However, he has not clearly indicated when long-term tax reforms will be submitted for discussion.
Why must the government raise the consumption tax? Can't it hike other levies?
Experts say a sales tax hike is the most effective way to raise tax money. If income taxes are raised, this would prompt high-income earners to move abroad.
But any consumption tax hike promises to be contentious because this would hurt low-income earners unless the government keeps the levy on daily goods and foods low.