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Abe must ensure economic recovery, fiscal reconstruction are compatible
Publication Date : 03-10-2013
The true value of the Abe administration, which emphasises the revitalisation of the economy, will be put to the test as it tackles the task of realising economic recovery alongside fiscal rehabilitation.
Prime Minister Shinzo Abe announced Tuesday that the government will raise the consumption tax rate from 5 per cent to 8 per cent in April as planned. He also said the government will implement a 5 trillion yen economic stimulus package, including a corporate tax cut.
We believe the tax hike planed for next spring should have been postponed to accomplish the main task of dragging the nation out of its deflationary phase. However, now that the prime minister has made this important decision, we have no choice but to accept it.
It would be terrible if the consumption tax hike stalled the economy. The government must ensure that its economic management policy is sound.
Job recovery halfway
At a press conference Tuesday, Abe explained the reason for going ahead with the tax increase, saying: “By helping the nation regain hope, vitality and confidence...we’re determined to pass a sustainable social security system to the next generation. This is the responsibility my Cabinet must fulfill.”
Securing a stable revenue source for ever-rising social security expenses—such as public pension, health care and nursing care programs—through the consumption tax hike is the foundation for implementing comprehensive social security and tax reforms agreed on by the Liberal Democratic Party, New Komeito and the Democratic Party of Japan.
The central government’s debts have grown beyond the 1 quadrillion yen mark, the highest among major economic powers.
In the financial market and elsewhere, there had been concerns that if the government postponed the consumption tax hike planned for next April, government bond prices would nosedive.
In light of the rapid acceleration of graying society and the chronically low birthrate, we believe the course of action taken toward raising the tax rate is reasonable.
What is problematic is the possibility that the economy, which has at long last started turning upward, will lose steam due to the tax rate hike.
The Bank of Japan’s closely watched Tankan survey showed that business sentiment among major companies improved significantly in September, posting the highest reading since the collapse of the Lehman Brothers in autumn 2008. Yet the pace of recovery is expected to slow down in the months ahead.
Even more worrisome is the employment situation. The jobless rate in August rose to the 4 per cent level for the first time in three months, while wages of salaried workers have continued to decline.
“By resolutely implementing bold economic measures, we’ll seize this opportunity for economic recovery,” Abe said.
Tax cuts urgently needed
Among the government’s economic stimulus measures is a corporate tax cut for companies that raise their workers’ wages, as well as tax reductions aimed at prompting capital investment and implementing research and development activities.
The new set of pump-priming measures also includes a plan to consider ending a temporary increase in the corporate tax rate aimed at helping finance reconstruction projects following the Great East Japan Earthquake in March 2011. After studying the pros and cons of scrapping the current special tax hike one year earlier than initially planned, the government aims to arrive at a conclusion on the matter by the end of the year.
It is undoubtedly essential to secure a source of revenue that can supplant the special corporate tax increase to fund postquake rebuilding policies and programs. Under such circumstances, the prime minister had every reason to say, “Nothing should hamper reconstruction efforts.”
He also urged the ruling parties to consider lowering the effective corporate tax rate immediately. As things stand, the rate, which is the ratio of corporations’ national and local tax payments to their taxable incomes, is higher than those levied in other major economies. No time should be wasted in boosting the international competitiveness of Japanese companies while at the same time attracting greater foreign investment to Japan.
In this regard, the prime minister’s initiative in drawing up a road map for reducing the effective corporate tax rate is quite significant.
However, Abe’s plan to raise the consumption tax rate, coupled with envisaged corporate tax cuts, has drawn fire from the public, as well as the ruling and opposition parties, for what they see as “preferential treatment for companies”.
Private-sector corporations are key players in the pursuit of economic growth. By taking advantage of the government’s support measures, they should play a role in facilitating a positive growth cycle through such measures as using their internal reserves for capital and other investment, as well as wage increases.
The new economic stimulus package is worth about 5 trillion yen, equivalent to the amount of revenue that could be raised through a two percentage point hike in the consumption tax rate. If it is reduced to a package of mostly show, but little substance, the set of pump-priming measures would do little to underpin the economy.
The question is whether a wide range of corporations will adequately take advantage of the tax cuts and other planned steps. The government needs to closely examine what will ensue from the package.
The government should avoid counting on a revenue increase that could be made possible through the consumption tax rate hike, anticipating it could increase the number of public works projects, including nonessential ones.
An extraordinary Diet session is scheduled to convene in mid-October, with a number of important items on the agenda, including a bill for increasing industrial competitiveness. The legislation is a major part of the Abe administration’s growth strategy.
We hope the government and the ruling parties will do all they can to ensure the upcoming Diet session proceeds smoothly, while also achieving their intended goals as swiftly as possible. This is essential as the Diet session should serve as a forum for discussions on how to set our nation’s growth strategy in motion.
Simple allowance not enough
It will take some time for the benefits of the planned corporate tax cuts to reach consumers through wage hikes. With this in mind, it is necessary to take measures that will benefit them in the short term to prevent a decline in personal consumption.
The government intends to implement what it calls “a simple allowance-granting measure” targeting low-income households in the form of a payment of 10,000 yen to 15,000 yen per person. However, there is a limit to what can be gained through such temporary handouts.
We believe a wider range of consumers, including people in the lower-income bracket, would benefit more from lower consumption tax rates for rice and other daily necessities, as well as newspapers that support democracy and a culture that values printed material.
The LDP and Komeito have said they will seek to introduce lower tax rates for basic necessities when the consumption tax rate is raised to 10 per cent. But we believe a reduced tax scheme should be put in place when the consumption tax rate is increased to 8 per cent next spring to reduce the burden shouldered by ordinary households.
US$1 = 97.60 yen