Abe takes bold tax step towards cutting debt

Japanese PM vows to unveil five trillion yen stimulus package to cushion the impact of raised sales tax to slash massive national debt

PUBLISHED : Tuesday, 01 October, 2013, 1:31pm
UPDATED : Wednesday, 02 October, 2013, 4:41am

Japanese Prime Minister Shinzo Abe took a step yesterday that none of his predecessors had managed in more than 15 years - making a dent in the government's runaway debt.

Abe, riding a wave of popularity with economic policies that have begun to stir the world's third-biggest economy out of years of lethargy, said the government would raise the national sales tax to 8 per cent in April next year from 5 per cent.

But at the same time he softened the blow to the nascent recovery. As the tax increase is set to raise eight trillion yen (HK$634 billion) a year, Abe also announced an economic stimulus package worth five trillion yen.

"It is my government's responsibility to have Japan's economy regain hope, vigour and confidence for growth, while at the same time maintaining trust in the country, as well as securely passing on the social security system to the next generation," Abe said in a nationally televised news conference.

The tax increase marks the first serious effort since 1997 to rein in Japan's public debt, which recently blew past 1,000 trillion yen. At more than twice the size of the economy, this is the heaviest debt load in the industrial world. The country also runs a huge annual budget deficit of 10 per cent of gross domestic product.

Yet, successive governments have done little to rein in spending. As Abe is watering down the impact of the tax increase and has yet to address an explosion of social-welfare spending, critics doubt yesterday's move will be enough to get Japan on track to achieve its goal of halving the budget deficit by 2016.

"Even if Abe's policies go well, we still will not eliminate the primary budget deficit," said senior Standard & Poor's official Takahira Ogawa.

Still, pressing ahead with the tax increase bolsters the image Abe has sought to foster of a decisive leader, withstanding opposition from his advisers and some of his own party.

"This plan was already in the works, but we have to give Abe some credit for following through with it," said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management.

Abe is seeking a difficult balance with massive fiscal and monetary stimulus to end 15 years of deflation and tepid growth, while setting the groundwork to get the government's finances in order over time.

Cushioning the tax-increase pain, yesterday's package features public-works spending for the 2020 Tokyo Olympics and tax breaks to promote corporate capital spending. Officials will also consider an early end to a corporate tax add-on that has funded reconstruction following the 2011 earthquake and tsunami, which would save companies 900 billion yen.

Abe also told the ruling coalition parties to start considering a permanent cut in the corporate tax rate, which he noted was high by international standards.

The package also offers some goodies to individuals, such as aid to home buyers, but will do little to silence critics who argue that "Abenomics" is tilted in favour of corporate Japan.