Wednesday, October 2, 2013
EDITORIAL: Tax Hike Should Start Real Fiscal Reform
TOKYO (Nikkei)--Prime Minister Shinzo Abe's decision to go ahead with the consumption tax rate rise is a welcome step toward a fiscally healthier Japan.
The consumption tax will go from 5% to 8% in April. Abe promised yesterday to cushion the effects of this rate rise with a package of measures to stimulate economic growth, worth about 5 trillion yen in total.
The decision, however, is only a first step in the long process of fixing the state's finances.
The government needs to follow up with measures to fix its budget woes while strengthening the foundation for economic growth.
Today, Not Tomorrow
The Japanese economy grew at a strong annualized rate of 3.8% in real terms in the April-June quarter compared with the previous three months, following a 4.1% expansion in the January-March quarter.
The Bank of Japan's latest quarterly tankan business sentiment survey, conducted in September, showed that the benchmark confidence index for large manufacturers hit its highest level since the global recession started in 2008.
The nation's economy is recovering steadily, supported in part by the benefits of Abenomics.
This makes domestic economic conditions favorable for the tax increase. But there are some worrying signs from overseas, including fiscal confusion in the U.S. and slowdowns in many emerging countries.
For far too long, Japan has been dragging its feet on serious and very needed fiscal reform. The combined central and local government debt load is now over 1 quadrillion yen.
We must not shift the burden of this debt to future generations -- fiscal overhauls need to be done today.
Match The World
At a press conference to announce the tax hike, Abe said Japan has no choice but to work on economic regeneration and fiscal rehabilitation simultaneously.
Abe is moving in the right direction by taking steps to mitigate the effects of the tax raise and smooth the way for the planned second hike in October 2015, to 10%.
The centerpiece of Abe's stimulus package is a set of tax incentives for capital investment and wage hikes.
The government will also consider terminating, a year ahead of schedule, the temporary corporate tax increase to finance efforts for reconstruction of areas devastated by the 2011 earthquake and tsunami, and lowering the effective corporate tax rate below 36% from the current 38% range in fiscal 2014.
These proposed tax incentives will have an effect, at least to a certain extent. But what is really needed to make Japanese companies more competitive internationally and make the nation a more attractive place for business investment is a reduction in the effective tax rate, which is higher than international standards.
The termination of the special reconstruction tax is a good place to start. But much more needs to be done.
Critics say it is unfair to ease the tax burden on businesses while increasing the load on consumers. They also criticize Abe's government for shortchanging people trying to rebuild from disaster.
But it is companies that create jobs and provide wages. Their vitality is essential for real economic recovery.
Reducing the corporate tax burden permanently would reenergize the whole economy and create benefits not just for companies but also for individuals.
The government should take this opportunity to review the cost of rebuilding disaster-stricken areas, which is estimated at 25 trillion yen. There have been reports that part of the money budgeted for the purpose has been diverted to unrelated projects.
The government should consider whether it is also possible to reduce or scrap the special income tax increase created to finance reconstruction efforts.
Companies should respond to Abe's action by not simply building up cash reserves, but by increasing investments and raising wages.
The worry is that the tax increase could undermine fiscal discipline. Abe and his government need to keep themselves in check in regards to spending on projects that are not urgently needed.
Still Not Enough
The consumption tax hike alone cannot restore fiscal health. The planned increase to 10% in 2015 will not be enough to balance the primary budget -- the budget before interest payments -- by fiscal 2020, a key fiscal policy goal.
It is vital for the government to continue policy efforts to cut its spending and increase its receipts.
Unfortunately, Abe's government is not showing much commitment to spending cuts.
The principal target of cuts should be social security spending. If the natural annual increase of 1 trillion yen in social security expenditures is left untouched, even raising the consumption tax rate into double digits will not pull the nation out of its budget morass.
The challenge requires fundamental reforms of the pension, health care and nursing care programs based on measures to put a greater burden on well-to-do elderly citizens.
Unless it comes up with a concrete plan to revamp the social security system to slash spending on these programs, the government cannot win public trust for its fiscal policy management.
The Japanese economy cannot be truly regenerated only with measures to stoke growth. It is crucial to make effective policy efforts to dig the nation out of a budget hole that is driving accumulated debt to unsustainable levels.
(The Nikkei, Oct. 2 morning edition)