EDITORIAL: Abe must stop ducking his responsibilities over tax hike
Prime Minister Shinzo Abe has told top government and ruling coalition officials that he has decided to postpone the scheduled consumption tax hike again.
The planned raise in the tax rate from 8 percent to 10 percent will be pushed back by two-and-a-half years from April 2017 to October 2019.
This will be the second delay in the tax increase. It was originally slated for October 2015, but Abe put it off to April next year.
But why October 2019?
Here’s an explanation circulating within the ruling camp.
Abe’s term as president of the ruling Liberal Democratic Party will expire in autumn 2018, and he wants to avoid a tax hike during his tenure as prime minister. Moreover, unified local elections and an Upper House poll are scheduled for spring and summer, respectively, in 2019. The unpopular measure to increase the tax burden on the public could badly damage the ruling coalition’s performances in these elections. So the step would be best delayed until after the elections.
PROMISED INTEGRATED REFORM
The current generation of Japanese depends, to a considerable extent, on government borrowing to finance social security programs that are supporting them. That means shifting the burden to future generations.
This structural debt financing of social security spending has left state finances in tatters, with government debt now surpassing a staggering 1,000 trillion yen ($9.01 trillion).
In 2012, the then ruling Democratic Party of Japan (now the Democratic Party), the LDP and its junior coalition partner, Komeito, reached an agreement on so-called integrated reform of tax and social security systems as a way to solve this structural fiscal problem.
The reform blueprint calls for raising the consumption tax and using all of the revenue from the levy, which is less vulnerable to changes in economic conditions, to fund social security outlays, including debt repayments.
The integrated reform was designed to ensure that the three parties would be solidly committed to implementing the tax increase, which would force the public to shoulder a heavier financial burden to support the safety net while insulating the measure from election battles and power struggles.
Abe’s decision to postpone the step for a second time, apparently motivated by concerns about elections, deserves to be criticized as a petty political maneuver that tramples on the spirit of the integrated reform.
In his November 2014 news conference to announce his first decision to postpone the tax raise, Abe stressed his commitment to fiscal reform.
“I will never back down from my vow to carry out fiscal rehabilitation,” he said. “The Abe Cabinet will never waver in its determination to secure the international community’s confidence in Japan and pass a (sustainable) social security system to the next generation.”
He also said, “I promise that there won’t be another delay (in the consumption tax hike).”
Has he forgotten these promises he made to the people?
FAR FROM ‘LEHMAN SHOCK’
As Abe has repeatedly said, any major economic upheaval like the ones that were triggered by the 2008 collapse of U.S. investment bank Lehman Brothers or the 2011 Great East Japan Earthquake would justify putting off the tax increase.
Indeed, the Japanese economy is not in good shape. Japan’s real economic growth rates in recent quarters have been hovering between minus 2 percent and 2 percent.
But that is not as bad as the 15-percent economic contraction that occurred immediately after the failure of Lehman Brothers or the shrinkage by more than 7 percent following the devastating quake and tsunami in March 2011.
As a plot to clear the way for delaying the tax increase again, Abe, at the recent Ise-Shima Group of Seven summit of major industrial nations, tried to promote the narrative that the world economy is now at risk of falling into a crisis that cannot be seen as an ordinary downward phase of the economic cycle.
Abe probably wants to convince people that economic concerns in other parts of the world, especially in some key emerging countries, argue against a tax hike now even though his economic program, or Abenomics, is working well.
Given objective economic data, however, it is not at all surprising that some of Japan’s G-7 colleagues, such as Germany and Britain, refused to support his argument.
Opposition parties are demanding Abe’s resignation, saying his decision to delay the tax hike again proves that Abenomics has failed.
Before debating whether Abenomics has been successful or not, however, we need to consider afresh whether these policies are an appropriate prescription for Japan’s economic problems.
One important indicator of a nation’s economic health is its potential growth rate. The government has admitted that Japan’s potential growth rate is less than 1 percent.
What kind of policy efforts are needed to increase Japan’s growth potential?
First of all, key social security programs, such as child-care and nursing-care support, should be enhanced.
It is vital to make it easier for people to receive the support they need in these areas through redistribution based on the tax and budget policy.
It is also crucial to improve the working conditions of child-care and nursing-care workers to expand the nation’s ability to provide these services. Expanding and strengthening the social safety net through increased burdens and benefits would help accelerate the flow of money within the economy and create new jobs.
Also important is deregulation to promote investment in promising areas, such as those related to global warming, energy conservation and artificial intelligence.
ABENOMICS NEEDS FIXING
Since these policy measures are unlikely to quickly produce the expected results, it is necessary to prop up the economy with monetary easing and fiscal expansion. But the government needs to take steps to mitigate the negative side effects of this approach as a basic principle of economic management.
Under Abenomics, the Abe administration has been seeking to raise inflationary expectations among people and businesses through the Bank of Japan’s aggressive “different dimension” credit expansion, or the “first arrow” of Abenomics, as the main incentive for consumer spending and business investment.
As for the second arrow--government spending--the administration has stressed “flexible” fiscal policy management, as embodied by a series of large-scale supplementary budgets.
In the news conference at the end of the G-7 summit, Abe declared, “We will again rev up the engine of Abenomics as much as possible.”
The BOJ keeps purchasing enormous amounts of government bonds under its unprecedented monetary expansion program. This situation could undermine the government’s fiscal discipline.
Extra budgets focused on public works expenditures and measures to stimulate consumer spending may shore up the economy temporarily but would cause further deterioration of the nation’s fiscal health, making the people even more worried about their future.
What Abe should do now is not “rev up” his government’s monetary and fiscal expansion drives. Instead, he should confront the limits and negative effects of Abenomics and correct the course of his economic policies. Then, he should deliver on his promise to carry through the integrated tax and social security reform to allay people’s anxiety about their future.
If the prime minister runs away from implementing a necessary policy measure that requires the people to accept pain before an election, he is effectively running away from his fundamental responsibility as the nation’s leader.