Prime Minister Yoshihiko Noda has warned that Japan still faces a tough road to fiscal health despite the Diet's Aug. 10 vote to double the country's consumption tax rate.
Noda pointed to increasing government expenditures and an aging population as hurdles still to be overcome.
"The decline in the birth rate and graying of the population are occurring at the fastest pace ever experienced by humanity," Noda said. "Someone has to bear the burden to support the social security system for such a nation."
His remarks, at a news conference following the passage of legislation to increase the consumption tax rate to 10 percent in October 2015, underscore the critical fiscal condition facing Japan.
The outstanding balance of central government bonds at the end of fiscal 2012 will stand at 709 trillion yen ($9 trillion), almost double the figure for 10 years ago.
Finance Ministry officials illustrate that figure as the equivalent of every man, woman and child in Japan having a debt of about 5.5 million yen.
The initial general account budget for fiscal 2012 recorded total expenditures of 90.3 trillion yen, but tax and other revenues only came to about 46 trillion yen. The government will have to issue a total of 44 trillion yen in new government bonds to make up for the difference.
A high-ranking government official said it was "an extremely unusual situation" to have close to half of government expenditures covered by debt.
In fiscal 2010, the primary balance for the central and local governments was a deficit of 28.6 trillion yen, the amount by which expenditures other than debt-servicing costs exceeded revenues excluding bond financing.
A surplus in the primary balance would help rein in the ballooning debt and improve the fiscal condition, but if primary balance deficits continue piling up, that debt will continue to soar.
According to a government estimate, if the consumption tax rate was not increased and government expenditures were restrained somewhat, the primary balance deficit would remain at around 25 trillion yen in fiscal 2016.
However, if the consumption tax rate was increased to 10 percent in October 2015, the primary balance deficit for fiscal 2015 would fall to 16.8 trillion yen due to a 13.5 trillion-yen increase in consumption tax revenues over the course of a year.
Even that scenario leaves Japan in a difficult situation.
Although the government has made an international pledge to achieve a primary balance surplus by fiscal 2020, one estimate says the primary balance deficit will still be around 16.6 trillion yen in fiscal 2020 even with a 10-percent consumption tax rate in place. Under that estimate, the only way for Japan to achieve a primary balance surplus would be by raising the consumption tax rate by a further 7 percentage points.
A major reason for the current financial difficulties is the 100 trillion yen of economic stimulus measures financed through government bonds that were implemented in the 1990s after the asset-inflated economy collapsed.
Another factor pushing up government expenditures is the annual increases of 1 trillion yen in medical and other social security expenses brought about by the rapid aging of the population.
A high-ranking Finance Ministry official said: "The consumption tax rate increase will not be enough to restore the nation's fiscal condition to a healthy state. Unless something is done about social security expenses, there will be talk about another tax hike, even with the increase to 10 percent."
Clearly, the fiscal condition cannot be rebuilt unless wasteful government spending is slashed in a way that also protects necessary social security programs.
Past experience has also shown that a hike in the consumption tax rate will not necessarily lead to an increase in tax revenues.
After the consumption tax rate was increased from 3 percent to the current 5 percent in April 1997, tax revenues for fiscal 1997 increased by 2 trillion yen over the previous fiscal year to a total of 54 trillion yen. However, in subsequent years, the revenues from personal and corporate income taxes have not increased due to economic stagnation, and total tax revenues have yet to exceed the figure reached in fiscal 1997.
Unless the central government restrains government spending as much as possible and presents a clear course for economic growth, the increase in the consumption tax rate could end up being simply an additional burden on the public that does nothing to improve the fiscal condition.
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