Plugging Japan's Debt Hole
Image Credit: Flickr/Yosshi (2007)

Plugging Japan's Debt Hole

 
 

The fictional tale of Hans Brinker tells of a nameless Dutch boy who plugs a dyke with his finger to save his country. Yet the hole the Japanese government has to seal in its public finances is very much bigger – and very real.

A government forecast released Friday showed that Japan’s annual budget gap could reach 23.2 trillion yen ($279.4 billion) at the end of fiscal 2020 (about 4.2 percent of economic output) under a ‘conservative scenario’ that doesn’t take economic reforms into account. Even a more optimistic projection, which includes economic stimulus effects, would see a primary balance deficit of about 16.2 trillion yen in March 2021.

If Kan wants to meet his government’s goal of balancing the nations’ debt by 2020, he has to find a long-term solution that doesn’t involve the issuance of yet more government bonds.

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Kan sees a hike in the consumption tax rate as the best means of raising revenue to lower the debt level. He has mooted a rise from the current 5 percent (extremely low in the developed world) to 10 percent. But, according to the government estimate, if consumption tax alone were used to balance the books, it would have to be raised by between 9 and 10 percentage points to triple its current level.

Economists and leading government figures, however, are more cautious about the effect of a sales tax hike.

Hiromichi Shirakawa, chief Japan economist at Credit Suisse, was quoted in the Wall Street Journal as saying that ‘a country's fiscal sustainability won't improve if measures to overhaul the fiscal state cause the growth rate to decrease.’

Banri Kaieda, the new industry minister, is keen to let the public decide whether a consumption tax rise is desirable, saying that Kan should call a general election if he plans an increase.

Kaieda’s electoral nemesis and now Cabinet colleague Kaoru Yosano is looking to open up discussion. On Tuesday, the new minister of state for economic and fiscal policy said that the government should lay down its plans for the tax and social security system by June and hold a multiparty forum on the issue. The pragmatic Yosano also said Friday that the government should consider raising the starting age of pension benefits from the current 65.

The problem with Kaieda’s approach is that it could cause yet more political instability. While the focus of an election could well be on the consumption tax debate (it shouldn’t be forgotten that main opposition Liberal Democratic Party’s murky policies also include a sales tax hike), it would be more pertinent to follow Yosano’s approach and take a cool look at the big picture. But again this depends on the cooperation of an uncooperative LDP.

The debt problem is going to hurt those paying taxes now and in future years more than those heading into retirement, especially when they cash in their bonds. So while the government should also consider other options as part of a package, a consumption tax hike appears to be a necessary evil – even a slim majority of the public are in favour, according to recent a Kyodo News poll.

With sales tax currently levied on pretty much everything, the government needs to think of more inventive ways of plugging the nation’s fiscal hole. Kan could win a sceptical public over to a rate of 10 percent or more by pouring some sugar in with the medicine and scrapping the tax on ‘good’ products such as books, food, children’s clothing and medicine.

Such approaches could help prevent the nation being swept away in debt – and help Kan in the polls in the process.

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