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Friday, June 25, 2010

Experts find tax pledge wanting

Even doubling the consumption levy to 10% deemed not enough to erase the national debt


Staff writer

Prime Minister Naoto Kan has begun to advocate raising the consumption tax to 10 percent, attacking the political hot potato head-on.

News photo
The prize: The National Diet Building in Tokyo is characterized by calm Wednesday. KYODO PHOTO

But experts aren't terribly impressed with Kan's tax pledge, saying a hike to 10 percent simply isn't enough to ward off a looming fiscal crisis.

The government probably won't be able to meet its goal of achieving a primary budget surplus by the end of fiscal 2020, either, they said, adding that the consumption tax would need to be raised to at least 15 percent to get the government on track for steady fiscal rehabilitation.

"I don't think 10 percent is enough," said Hisakazu Kato, an economics professor at Meiji University.

"A 1 percentage point hike increases revenues by about ¥2.4 trillion, so a 5 percentage point rise would add revenues of around ¥12 trillion. The primary budget deficit is about ¥30 trillion now, so simple arithmetic shows it isn't enough," Kato said.

The government unveiled a 10-year fiscal reconstruction plan Tuesday that aims to achieve a surplus in the primary budget balance by the end of fiscal 2020.

The primary budget balance for a given year is defined as the difference between revenues excluding government bond sales and expenditures excluding debt-servicing costs.

Kato said because the government is planning to lower the corporate tax over the next 10 years, even a 15 percent consumption tax might not be enough.

In fact, when the government disclosed its 10-year economic growth strategy last week, the Cabinet Office revealed its own simulation data that indicate a 10 percent consumption tax would likely fall short of achieving a surplus in the primary balance.

The simulation showed that if the economy were to keep growing by 2 percent annually until 2020, the primary budget deficit would shrink to ¥13.7 trillion thanks to the resultant increase in tax revenues.

The average economic growth rate over the past 10 years, however, was only 0.8 percent. Based on another "conservative" scenario assuming 1.5 percent annual growth, the primary balance would be ¥21.7 trillion in the red in fiscal 2020.

The ¥12 trillion expected from raising the consumption tax to 10 percent would fall far short of filling the gap in either scenario.

Masaya Sakuragawa, an economics professor at Keio University, recently conducted a simulation on the sustainability of the national debt.

It showed that the tax has to be raised to 15 percent to stop the snowballing public debt.

Under his simulation, based on 1.4 percent economic growth in real terms and the premise that social security costs won't increase drastically, a 10 percent consumption tax would fail to stop the national debt from expanding, eventually leading to fiscal failure at some point in the future.

Sakuragawa also pointed out that Kan has been talking about dedicating money from the consumption tax to fund social security programs, but that is the wrong approach.

"Consumption tax revenues should not be limited for specific purposes, since the structure of expenditures could change in the future," he said.

Talk about raising the consumption tax always comes with an argument over the economic impact.

Because the economy has been so anemic, some lawmakers, including Shizuka Kamei, leader of coalition partner Kokumin Shinto (People's New Party), say a hike should not be implemented at this time because it would further slow the already sluggish growth rate.

Sakuragawa, however, said the negative impact can be offset depending on how the increase is introduced.

For instance, it would of course put a scare in consumers if the tax is raised by 5 percentage points all at once, but annual increases of 1 percentage point over five years could create a rush in demand every year before the raise, he said.

Kato of Meiji University said a hike in the consumption tax wouldn't have any positive effects on the macro economy directly, but a Greece-type fiscal meltdown would be a disaster and measures to prevent such a crisis should be the priority.

"I think it would be much riskier than raising the consumption tax to do nothing about reducing the debt and possibly causing an excessive reaction in the market that would lead to a plunge in government bond prices," he said.

"To aim for medium- and long-term growth, we should reduce the public debt now . . . to avoid following Greece's path," Kato said.


Gist of Kan's fiscal reform goals

• Bring the primary balance for the central and local governments back into the black by fiscal 2020 after halving the deficit by fiscal 2015.

• Steadily reduce the debt-to-GDP ratios for the central and local governments starting in fiscal 2021.

• Secure stable resources to cover rising health care and welfare costs, which will likely swell structurally as society continues to gray.

• Use a medium-term fiscal framework through 2013 to keep issuance of new bonds below ¥44 trillion — the level planned in the initial budget for fiscal 2010.

• Keep the budget below around ¥71 trillion, the level planned for fiscal 2010.

• Form a detailed plan to drastically reform the tax system, including hiking the consumption tax, "at an early date."




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