The Journal The Authority on Global Business in Japan

cabinet office
Budget goal depends on tax rise, expenditure reform

Balancing the fiscal budget by 2025 was a focus of discussion during a January 30 committee hearing on fiscal policy. This would see achievement of the goal ahead of previous projections, which had already moved up the target year from 2027 to 2026. The optimistic projections are based on budgetary reforms—particularly the res­training of social welfare outlays—and boosted tax revenues to be realized through economic recovery.

However, an actual economic growth rate of two percent would be required, and this is above the average seen during the entire tenure of Prime Minister Shinzo Abe. Many are voicing skepticism that such fiscal health can be achieved.

According to the mid-to-long-term pro­jections, the balance of payments deficit for fiscal year 2020 will expand to ¥10.1 trillion. So balancing the budget presumes that the first decade of the 2020s will bring nominal economic growth of three percent and actual growth of two percent, and that the consumption tax will rise from eight to 10 percent this October, thereby boosting revenue.

But such a growth rate may be no more than wishful thinking. When the current Abe administration began in December 2012, the average nominal economic growth rate was just two percent and the actual rate was 1.2 percent.

An increase in tax revenues is essential to providing support for the new target. The government is projecting revenues from taxes and other sources of ¥86.5 trillion in fiscal year 2026—an increase of ¥18 trillion over the ¥68.8 trillion it expects in 2019.

The growth of Japan’s economy has also been slack, with an earlier projection of 1.5 percent being downgraded to 1.2 percent. If Japan’s trade is negatively affected by friction between the United States and China, this might drop further.

The government, through additional efforts to achieve fiscal health, aims to reach a budget surplus in 2025. Up to now, however, it has repeatedly delayed the realization of its fiscal targets. Should it once again be forced to put off achieving its stated goals as a result of the same sort of wishful thinking, Japan’s fiscal trustworthiness will be further eroded.

 

Ministry of FINANCE
Falsified data may lead to third tax hike delay

A yellow light may be flashing ahead of October’s planned consumption tax hike. Recent revelations that the Monthly Labor Survey—the data issued by the Ministry of Health, Labour and Welfare that tracks trends in wages and working hours—had been manipulated has cast doubts on the effectiveness of Japan’s Abenomics economic policies. Abe has indicated his intention to go through with the consumption tax increase “short of anything less than the magnitude of the 2008 financial collapse.” But serious questions have arisen over the economic data used to justify the tax increase.

The news is said to have triggered dis­putes even within the ruling coalition. During a radio broadcast on January 3, Chief Cabinet Secretary Yoshihide Suga emphasized that the decision to proceed with the tax hike will be “at one juncture” following approval of the 2019 fiscal year budget and the passing of the pending bill on tax reforms. Considering such factors as US–China trade friction, he pointed out that anything could happen with regard to future economic trends. “Depending on the situation, the tax hike might be postponed,” he said.

The government’s calendar is crammed with upcoming activities, including elec­tions on the regional level and for the upper house of the Diet in July. Politicians who wish to give priority to the election see the current troubles as equivalent to a Lehman-style financial crisis, and it is possible they will feel pressure to support a delay in the consumption tax hike.

Speculation is being echoed in some quarters that Abe might announce the postponement of the tax hike, with his justification being that it would afford him an advantage in calling for a general election in both the lower and upper houses. But, as of mid-April, there has been no decision.

Keizaikai magazine