Parties must show how to deal with deficit
How can Japan, which has the largest deficit among developed countries, rebuild its finances? This is a vital issue to be contested during the House of Representatives election campaign and a theme neither the ruling nor the opposition parties can avoid.
The ruling coalition of the Liberal Democratic Party and New Komeito is already armed with a passable proposed solution. The proposal comprises two fiscal reconstruction goals that were incorporated in the fiscal policy guidelines for 2009 approved by the government in June.
The first goal is for the central and local governments to achieve a surplus in their primary balances by fiscal 2019, which indicates a degree of fiscal soundness. The second is to lower the ratio of outstanding debts owed by central and local governments to the gross domestic product by the early 2020s.
In the past, the government had planned to achieve a surplus in the primary balance by fiscal 2011, but decided to postpone the target year substantially after the initial plan became impossible due to the recent economic downturn.
Govt sticks to goals
However, the government still deserves praise for not abandoning its goal of fiscal reconstruction. The central and local governments' combined outstanding debts are estimated to exceed 800 trillion yen by the end of fiscal 2009. They have already reached 170 percent of GDP. If the debts are left unattended, the nation is likely to face fiscal catastrophe.
One measure to help achieve the two goals is to raise the consumption tax rate. The fiscal policy guidelines informally propose an option of increasing the consumption tax rate by 1 percentage point a year starting from fiscal 2011 until it has been raised by 7 points to 12 percent.
The consumption tax is significant also as a stable resource to finance social security expenses that are ballooning as the nation's population is aging and the declining birthrate indicates the funding from pension contributions will drop. It is reasonable to start preparations now so that the consumption tax rate can be raised as soon as the economy stabilizes.
Meanwhile, the Democratic Party of Japan has not discussed fiscal reconstruction in concrete terms in its manifesto for the lower house election. On the contrary, the opposition party has listed in it a set of policy measures that would require large expenditures.
They include a child allowance, free public high school education, income guarantees for farming families and elimination of highway tolls. These measures may look like they would lead to a reduction of the public financial burden, but they do not--taxpayers will eventually have to bear the costs.
The DPJ says that the party would be able to secure financial resources totaling nearly 17 trillion yen by trimming the fat in the budget and using the "buried treasure" that includes investment returns in the Fiscal Investment and Loan Program Special Account and the Foreign Exchange Fund Special Account, but we do not think it possible to find such a huge amount of money through such measures.
The DPJ said that it would not raise the consumption tax rate for the next four years if the party takes office. DPJ President Yukio Hatoyama once said that his party would not even discuss the issue, but he has lifted such a ban--apparently due to pressure from DPJ Secretary General Katsuya Okada.
If he really means it, as DPJ leader, Hatoyama has a responsibility to thoroughly discuss the possibility of a consumption tax hike during the election campaign and to show voters how his party would handle the consumption tax in the future.
(From The Yomiuri Shimbun, July 29, 2009)