Prime Minister Shinzo Abe announced on Oct. 15 that he intends to raise the consumption tax from 8 percent to 10 percent in October 2019 as planned, and instructed his ministers to devise detailed measures to shore up the economy.
The hike was originally scheduled for 2015, but the premier postponed it twice, citing the tough economic situation at the time. Some observers were expecting another delay as the House of Councillors election next summer would come right before the planned tax increase.
But taking proper countermeasures to ease the additional burden on consumers is an important task for politicians.
The consumption tax is a stable source of funds to cover ever-growing social welfare spending amid the aging population. The government currently borrows a lot to pay for these outlays, setting aside the bill for future generations. A tax hike cannot be avoided to stop this practice.
From this perspective, raising the consumption tax as scheduled is reasonable. The problem is the size and the content of the economic stimulus package to be determined by the end of the year.
When the consumption tax was increased to 8 percent from 5 percent in 2014, the government introduced a 5.5-trillion-yen stimulus package. This time, some members in the ruling coalition of the Liberal Democratic Party and Komeito are calling for greater countermeasures ahead of the upper house poll.
Watching the economic situation carefully is indeed important. But the tax hike this time is 2 percentage points, smaller than the 3 percentage points in 2014. Moreover, the rate for food and other items will remain at 8 percent. The premier also intends to spend half of the additional revenue from the raise on making some parts of educational programs free of charge and for other purposes.
The Bank of Japan estimates that the new burden households have to shoulder because of the hike will be a little over 2 trillion yen, far smaller than in 2014.
The prime minister said he would introduce “every measure possible” to stimulate the economy against the hike. But placing an excessive emphasis on pump-priming measures would only spur the ruling camp to demand more spending.
Stimulus programs under consideration by the government include those with unproven effectiveness.
For example, one program would subsidize small- and medium-sized retailers to give purchase points to customers who buy items without using cash. But this will not benefit people without credit cards or smartphones, and may cause confusion.
Some initiatives have signs of becoming pork-barrel measures. Expanding spending for public works to stimulate demand is being considered, but this may result in paying for inefficient programs amid many natural disasters requiring reconstruction work. Tax breaks for cars and housing loans may end up reducing future demand.
The main purpose of raising the consumption tax is to stop delaying payments. But this important goal cannot be met if handout programs in the name of stimulus measures increase debt.
It’s important to create an economy that can grow steadily even with a tax hike. Spurring consumption through pay raises and the employment of full-time workers is necessary. The government should not depend too much on spending programs.