November 2, 2007 / 6:24 AM / 11 years ago

Tax hike gathers force under new Japan PM

TOKYO (Reuters) - Japan’s government has put raising the rate of consumption tax back on the political agenda by offering Japanese a choice — deep spending cuts in social welfare or the higher tax.

The politically sensitive tax has made a comeback a month after Prime Minister Yasuo Fukuda took office faced with the need to rein in soaring social security costs, as the population ages, and a hefty public debt.

If you listen to the government the issue is critical. Without a tax rise, spending on social welfare will drop sharply in the next two decades, a concern that could well strike a chord in Japan, which has the world’s highest percentage of elderly people.

The alternative is to raise consumption tax, currently 5 percent, which will allow Japanese to enjoy their current levels of social welfare and let the government cut the country’s massive public debt.

“The government is urging people to choose between accepting a tax hike and drastic cuts in spending on social welfare,” said Takahide Kiuchi, senior economist at Nomura Securities.

“By presenting such scenarios, it is cleverly trying to win people’s support for sales tax hikes,” he said.

Key backers of a tax hike have been appointed to main posts in the ruling Liberal Democratic Party (LDP) to pave the way for the tax increase, which took a backseat under Fukuda’s predecessor, Shinzo Abe.

The former prime minister, who also led the LDP, emphasized economic growth as the way to rein in Japan’s public debt of about $6.7 trillion — one and a half times the size of the economy.

“The tide has apparently turned,” said Susumu Kato, chief economist at Calyon Securities.

Kaoru Yosano, who holds a key post in the LDP’s tax panel that is charged with producing proposals on annual tax reform in December, says Japan has no choice but to raise the tax.

“If you really want to maintain Japan’s pension, medical care and nursing service system, we cannot avoid (raising) the consumption tax,” he told Reuters in an interview last month. <ID:nTKX002854>

But analysts say tax increases are unpopular with voters and would give the political opposition, which controls the less powerful upper house, a rod with which to hit the LDP’s back ahead of lower house elections in 2009.

Indeed, if the opposition, which advocates spending cuts to reduce debt and boost the government’s fiscal position, can force parliament into deadlock, an early election could result.

That scenario raises uncomfortable memories for the LDP. It was routed in elections in 1998 following an unpopular increase in the tax the year before.

CUTS OR TAX HIKE

A government estimate in October said Japan would need to raise the tax and premium burdens on the working population by 30 percent, or more than 400,000 yen a year per worker, by fiscal 2025/26 to keep the current level of social security.

Without increasing the burden, the government would have to slash medical expenses for the elderly by some 20 percent and their nursing care by about 40 percent.

The figures carry significance in a country that has the world’s highest percentage of elderly people. By the middle of the century, two out of five Japanese are expected to be 65 or older, double the current figure, Japanese government data shows.

The government’s social security outlay is steadily rising and accounts for a quarter of the state budget in fiscal 2007/08.

Social security payouts — funded by taxpayers’ money and premiums paid by individuals and companies — will shoot to 141 trillion yen in fiscal 2025/26 from the current 90 trillion yen.

Economists say the LDP has to persuade the electorate to accept a higher consumption tax by 2009/10 when the government plans to raise its share of contributions to the state’s basic pension program because the number of working people paying into the system is falling.

“A 3 percentage point rise in the sales tax would be needed if the government tries to finance pensions and meet its target of a balanced budget early in the 2010s,” Kato said.

The government has vowed to bring Japan’s primary budget deficit — which excludes debt and related costs — into surplus by fiscal 2011/12, from an estimated 4.4 trillion yen deficit ($39 billion) in the current fiscal year.

Some analysts doubt the LDP can build a successful case for a tax hike when the opposition bloc is presenting voters with an alternative idea — cutting spending elsewhere without raising the consumption tax.

“There is still room for spending cuts in areas other than social security, such as public works projects,” said Hisashi Yamada, senior economist at the Japan Research Institute.

“The tax hike talk may not win people’s support unless the government makes enough effort to cut such spending first.”

$1=114.69 Yen

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