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FOCUS: Further fiscal reforms seen inevitable after tax hike

Tokyo, Oct. 16 (Jiji Press)–Japan’s Prime Minister Shinzo Abe aims to prop up personal spending and boost the nation’s stagnant birthrate by using part of revenue from the upcoming consumption tax rate hike for measures to support families raising children.

Further reforms in government spending and revenue are inevitable, however, since it will be very difficult to cover ballooning social security costs reflecting the rapidly aging population with the tax rate increase alone, analysts said.

On Monday, Abe clarified his determination to go ahead with the tax increase to 10 pct from the current 8 pct in October 2019 as planned, after the 2-percentage-point rate hike, originally slated for October 2015, was postponed twice.

The tax hike is expected to increase revenue by about 5.6 trillion yen. The government initially planned to use some 4 trillion yen out of the additional revenue to curb the issuance of deficit-covering bonds and the remainder for beefing up social security measures, mainly for elderly people.

But after the consumption tax was raised to 8 pct from 5 pct in April 2014, Japan’s gross domestic product fell back in inflation-adjusted real terms in the fiscal year that ended in March 2015.

In late 2017, Abe, in a policy shift, decided to earmark 1.7 trillion yen out of the estimated revenue from the tax hike to 10 pct for measures such as increasing the number of nursery teachers and making higher and preschool education free of charge in order to support child-rearing families and reduce their financial burdens.

The government plans to work out details of these measures by the end of this year and reflect them in its budget for fiscal 2019 from next April.

On Monday, Abe stressed that preschool education will be made free of charge from Oct. 1, 2019.

The consumption tax rate will be kept at 8 pct for certain products, including food, leading to a revenue loss of about one trillion yen.

But the government has secured offsetting revenue sources for only part of the amount, and the issue will be addressed in its fiscal 2019 tax system reform discussions.

Under the government’s fiscal 2018 general-account budget, social security costs total 33 trillion yen, nearly three times the fiscal 1990 level of 11.6 trillion yen.

According to an estimate by the Cabinet Office, such costs will surge to 41 trillion yen in fiscal 2025, when all postwar baby boomers will be 75 or older, heavily weighing on the government coffers.

In recent years, the government has annually issued about 30 trillion yen of deficit-covering bonds to make up for revenue shortages, continuing to pass repayment burdens on to future generations.

The dire situation will unlikely be corrected with the consumption tax hike to 10 pct alone, analysts said.

To prevent a situation in which government debts continue snowballing and repayments become impossible, policymakers of the country are facing a test of whether they can show to the public their determination to go ahead with reforms resulting in pain, pundits said.

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