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2014年4月 2日 (水)

(社説)17年ぶり消費増税 改革の原点に立ち返れ

April 01, 2014
EDITORIAL: With new tax rate up and running, spending reform must be next step
Previous ArticleEDITORIAL: Japan loses credibility as corruption-tainted aid projects continue
(社説)17年ぶり消費増税 改革の原点に立ち返れ

The consumption tax rate went up from 5 percent to 8 percent on April 1.

This is obviously a painful increase for the public. But given the fiscal deficits and debt morass that plague this nation, it was inevitable.

The question is whether political leaders are taking steps to make the pain bearable for the right reasons. Let us remember the reason the tax rate was hiked in the first place.


It is simply the key component of the government’s policy to reform the tax and social security systems in an integrated manner.

Social security spending, which accounts for more than 30 percent of the general-account budget, is partly financed by the issuance of government bonds because social insurance premiums and taxes do not cover the total outlay. In short, part of the burden of financing social security payouts for people living today is being shifted to future generations.

The proposed reform is designed to change this situation and secure long-term financial sustainability of the public pension system, along with the health and nursing-care insurance programs, while enhancing meager policy support for child-rearing families. The overhaul is aimed at re-energizing the economy by easing consumers’ concerns about their future and thereby stimulating their spending.

Under a policy initiative to achieve these goals, it was decided that the consumption tax rate will be raised to 10 percent in a two-stage hike. The next increase is slated for October 2015. The additional tax revenue will be used exclusively to fund social security spending.

But not all the increase in tax receipts will go to improve social security benefits. Much of the money will be used to reduce the amount of new government bonds to be issued. The tax increase, however, will not be enough to make up the revenue shortfall as social security spending keeps rising due to the aging of the population.

This is the grim reality facing Japan.

What, then, can be done to prevent financial collapse?

Three things are essential. First, effective steps must be taken to lay the foundation for renewed economic growth, which would automatically bolster tax revenue. Secondly, the state budget needs to be seriously overhauled to ensure that the limited revenue is used as effectively as possible. Thirdly, the government should confront the need to implement more tax hikes.

Especially important is the budget reform. Taxpayers will not support any proposal to raise taxes unless they are convinced the money they pay is used properly.


But the Abe administration is showing no signs that it is seriously aware of the need to cut state finances.

The administration compiled a supplementary budget worth 5.5 trillion yen ($53.3 billion) last fiscal year, aiming to alleviate the expected economic impact of the tax hike. The amount is even bigger than the estimated increase in tax revenue for the first year following the tax increase. Combined with the initial budget for the new fiscal year starting on April 1, which is the largest on record, the government’s total spending will top 100 trillion yen.

The figure is based on two separate spending plans for different fiscal years and should not be compared simply with a budget for a single year. But it is still worth pointing out that the amount is on a par with the bloated budgets formulated by the previous government led by the Democratic Party of Japan, which Abe’s Liberal Democratic Party harshly criticized as a reckless spending spree.

There are many issues that should be dealt with to cushion the impact of the tax increase. The government, for instance, should take measures to lessen the “regressivity” of the consumption tax, which means the burden is heavier for people with less income.

But the Abe administration is ramping up the budget, claiming the tax increase create fresh room for spending growth or that public spending should be increased to prevent the economy from losing steam. The administration’s spending binge raises serious doubts about its commitment to the original purpose of integrated tax and social security reform.

Symbolizing the administration’s willingness to pump up spending is its public works budget.

Policymakers within the government and the ruling parties are clamoring for an expansion of public works spending. Proponents argue that it is urgently needed to repair aged infrastructure and improve the nation’s preparedness for natural disasters. They call for forward spending on public works to tackle these challenges and keep the economy on a recovery path. Some of them also claim public works spending should be increased if only to ease the negative effects of massive cuts made by the DPJ-led government.

The administration appears to be bent on promoting public works projects without making any serious assessment of their cost effectiveness by waving the banner of disaster preparedness. It is hard to believe that the government is making serious efforts to consolidate existing public facilities while shifting the focus of its public works policy from new construction projects to measures to deal with the deterioration of existing facilities.

In addition to projects to rebuild areas devastated by the Great East Japan Earthquake and tsunami in 2011, the government has also embarked on new public works projects to stoke economic growth and improve infrastructure for the 2020 Tokyo Olympics. The expansion of infrastructure spending has triggered steep rises in the wages of construction workers and the prices of construction materials. There have been many cases where bidding for a public works contract failed to result in the selection of the contractor and forced the government to raise the bid ceiling. Rising construction costs inevitably lead to increases in both public spending and debt.


A study of past government attempts to improve their fiscal health found that successful efforts were focused more on spending cuts than on tax hikes.

The survey was conducted in the late 1990s by Alberto Alesina, a professor of political economy at Harvard University. Alesina wrote a paper on the study, which looked into various attempts for fiscal rehabilitation made by industrial nations since 1960 onward. In successful cases, the ratio between spending cuts and tax hikes was around 7 to 3.

Even though the study only covered a limited number of cases, it clearly supports the conventional wisdom that budget reforms and spending reductions are vital for fixing state finances. Given Japan’s woeful fiscal conditions, which are among the worst in the developed world, there is no choice for the government but to pursue simultaneously both tax increases and budget reforms.

In its campaign platform for the 2009 Lower House election, the DPJ, which came to power through the poll, promised to raise more than 10 trillion yen to finance its policy proposals through budget restructuring. But the party failed to deliver on the promise.

Overhauling the budget for spending cuts cannot be done overnight. It requires scrutinizing individual policy programs and reducing the expenditures on surviving ones as much as possible. Only such low-profile, tenacious efforts can lead to real progress. The Abe administration is clearly moving in the opposite direction by taking advantage of the tax hike to increase government spending.

Since the collapse of the asset-inflated economy in the early 1990s, the Japanese government has put together extra budgets almost every year to promote economic growth.

The total value of outstanding government bonds has tripled to 750 trillion yen since the last consumption tax increase 17 years ago. The overall government debt load, including borrowing, has surpassed 1,000 trillion yen.

If it proceeds with the planned additional hike in the consumption tax rate to 10 percent, the government will have to push through a fundamental reform of the bloated budget for significant spending cuts.

--The Asahi Shimbun, April 1


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