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Japan unable to achieve fiscal consolidation despite tax hike

Tokyo, Oct. 1 (Jiji Press)–The Japanese government can hardly meet its fiscal consolidation target although the consumption tax rate was eventually raised from 8 pct to 10 pct on Tuesday.  

 

The tax increase will help the government’s general-account tax revenue reach a record 62.5 trillion yen for fiscal 2019. But at the same time its general-account expenditures are estimated to swell to 101.5 trillion yen for the year ending next March due to growth in social security and defense outlays.

 

As the government needs to keep relying on debut issues to cover ever-rising costs to cope with the rapidly aging population, it cannot achieve its goal of turning the primary balance into the black in fiscal 2025 even with the 10 pct consumption tax, the biggest revenue source, and annual economic growth of at least 3 pct in terms of nominal gross domestic product, according to a Cabinet Office estimate.

The latest consumption tax hike, expected to raise tax revenue by about 5.7 trillion yen a year, is not enough if the government wants to realize not only the primary balance surplus but a stable social security system, some pundits said.

But Prime Minister Shinzo Abe already said in July that another hike in the tax “will be unnecessary over the next 10 years,” preventing the government’s Tax Commission from proposing more hikes in its midterm report released in September.

Spending on social security benefits is projected to rise from about 121 trillion yen in fiscal 2018 to 140 trillion yen in fiscal 2025 and around 190 trillion yen in fiscal 2040, with the baby boomers starting to turn 75 in fiscal 2025.

“The consumption tax hike this time was like a drop in the ocean,” a senior welfare ministry official said. “We have to draw a reform path beyond the tax hike.”

In September, the Abe administration launched a new panel on social security reform. However, it remains to be seen whether the administration will venture into the thorny issue of “painful” spending cuts.

“We’re not considering at all a cut in social security spending only from a fiscal perspective,” economic revitalization minister Yasutoshi Nishimura has said.

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