Doubts are being raised about the effectiveness of Prime Minister Yoshihiko Noda’s consumption tax hike, with some critics calling it a “reckless” move that will dampen personal consumption, slash corporate investment and reduce overall tax receipts.
Others point out that certain plans in place run counter to efforts to rebuild public finances and strengthen social security services.
Even the government’s own figures show that revenue from the higher sales tax will probably fall well short of its fiscal rehabilitation goals.
A senior Finance Ministry official said the tax hike will be entirely different from the introduction of the 3-percent consumption tax in 1989 and the increase to the current 5 percent in 1997.
In 1989, income, corporate and other taxes were reduced, more than offsetting the consumption tax. In 1997, income and other taxes were cut, canceling out the tax increase.
The legislation that passed the Lower House on June 26 will raise the consumption tax rate to 8 percent in April 2014 and to 10 percent in October 2015. But this time, no tax cuts are planned due to fiscal constraints.
According to SMBC Nikko Securities Inc., consumer spending will likely surge, particularly for big-ticket items such as homes and automobiles, before the first phase of the tax hike, lifting economic growth in fiscal 2013 by 1.4 percentage points.
But after the tax rate is raised to 8 percent, personal consumption will decline in fiscal 2014, lowering economic growth by 1.8 percentage points, according to SMBC Nikko estimates. After the second-stage tax increase, economic growth in fiscal 2015 is projected to decline by 0.1 percentage point.
“We must say it is reckless to raise the (consumption) tax rate under deflation,” said Nobutsugu Shimizu, chairman of the Japan Chain Stores Association.
The government expects an additional 13.5 trillion yen ($170 billion) in annual consumption tax revenue after the rate is raised to 10 percent.
Consumption tax revenue has been stable at around 10 trillion yen annually since fiscal 1997, but overall tax receipts have never exceeded 54 trillion yen due to the economic slump, deflation and other factors. Tax revenue for fiscal 2012 is projected at 42 trillion yen.
If the economy deteriorates due to the consumption tax hike, personal consumption and corporate investment are expected to fall, while revenue from income and corporate taxes will likely decline.
“The (consumption) tax increase is necessary, but the timing must be postponed depending on economic conditions,” said Masami Iijima, president of Mitsui & Co.
One clause in the consumption tax hike legislation calls on the government to make a final decision on the tax hike in the latter half of fiscal 2013 based on economic conditions, commodity prices and other factors. Under the clause, the government is expected to achieve a nominal economic growth of 3 percent and a real economic growth of 2 percent.
Teppei Ino, an analyst at the Bank of Tokyo-Mitsubishi UFJ, said the political turmoil that will likely continue over the issue could thwart plans to actually raise the rate.
“It remains unclear whether the government will be able to make a final decision on the tax hike,” Ino said.
In addition, the government appears heading in the opposite direction of cutting spending to prevent a further swelling of its debt.
Public-works projects were revived ostensibly for reconstruction and disaster prevention following the Great East Japan Earthquake and tsunami last year. The initial budget for fiscal 2012, including reconstruction projects in the disaster areas of the Tohoku region, ballooned to more than 96 trillion yen, a record high.
Among the large-scale projects are a 1.28-trillion-yen loop road in the Tokyo metropolitan area and a 1.4-trillion-yen road along the tsunami-hit Sanriku coast in northeastern Japan.
The opposition bloc, which was instrumental in passing the consumption tax hike bills, is also putting pressure on the government to approve pork barrel projects. The main opposition Liberal Democratic Party submitted a bill to the Diet in early June to funnel 200 trillion yen into public-works projects over 10 years in the name of disaster preparedness.
The government aims to achieve a primary balance surplus in fiscal 2020 for fiscal rehabilitation, meaning that revenues excluding bond financing exceed expenditures other than debt-servicing costs.
But a primary balance deficit of 17 trillion yen is projected for fiscal 2020--even after the consumption tax rate is increased to 10 percent. Government estimates show that the tax rate must be raised by an additional 7 percentage points to achieve a surplus.
The government has promised to simultaneously reform taxes and social security, saying the increased consumption tax revenue will strengthen medical services and pensions, as well as nursing-care and child-rearing support.
However, only 2.7 trillion yen of the additional annual consumption tax revenue will be allocated for new social security initiatives, such as child-care support and benefits for low-income pensioners.
The remaining 10.8 trillion yen will be used simply to maintain the existing social security framework, which relies on debt financing.
“The government has delayed reforms, such as the containment of social security benefits and the correction of inter- and intra-generational disparities,” Yasuchika Hasegawa, chairman of Keizai Doyukai (Japan Association of Corporate Executives), said.
(This article was compiled from reports by Yukako Ito and Masahiro Yuchi.)
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