Shinzo Abe

The big tax gamble that Abe must take

PUBLISHED : Tuesday, 08 October, 2013, 12:00am
UPDATED : Wednesday, 09 October, 2013, 4:59pm

First the stimulus, now the payback. Shinzo Abe is taking a big gamble by raising sales tax for the first time in more than 15 years.

In doing so, the Japanese prime minister works against some of his closest economic advisers and risks choking off his country's nascent economic recovery from two decades of off-and-on deflation. The last time the country increased the levy in 1997, the resultant recession undermined his Liberal Democratic Party's hold on power.

Yet, Abe is right to go ahead with the tax rise.

Japan's gross-debt ratio, already the highest in the developed world, is almost two-and-a-half times the size of the economy. Any responsible leader must address the ballooning debt even as he works to restart the economy.

In any case, Abe is taking a calculated risk. "Abenomics", his mix of government spending and loose monetary policy, has delivered the fastest growth among Group of Seven countries so far this year.

Expanding at an annualised rate of 4 per cent in the first half, Japan's gross domestic product is growing at twice the rate of the US and quadruple its own average over the past two decades.

The latest quarterly "Tankan" survey, conducted by Japan's central bank, finds confidence among 10,500 large and medium-sized companies to be at the highest since 2007, before the onset of the global financial crisis.

Against this backdrop, Abe is hoping that the Japanese economy is on track and can deal with a moderate tax rise.

He is also softening the pain with new spending measures that include expanding tax relief for homebuyers, cash disbursements for low-income earners and dropping a surcharge on corporate income tax introduced in 2011.

This is a delicate balancing act between economic recovery and fiscal consolidation. If Abe pulls it off, it will be a game-changer for Japan.

It will also be a big positive for the world economy.