Japanese policy makers likely won’t allow an economic slowdown to derail the plan to increase the 5 percent sales tax from 2014, a former Finance Ministry official who oversaw the boost in the levy in 1997 said.
“The Japanese government will probably push through a tax increase even if the pace of economic growth slows somewhat” and deflation lingers, Shigeki Morinobu, 62, formerly a director of the ministry’s tax bureau and currently a professor at Chuo University’s law school in Tokyo, said in an interview this week. “Failure to go through with the increase may spur investor concern that Japan lacks the will to raise taxes.”
Only a crisis akin to the collapse of Lehman Brothers Holdings Inc. in 2008 would compel the government to abandon Prime Minister Yoshihiko Noda’s plan to double the levy, which won approval of the lower house of parliament this week, said Morinobu. Japan’s economy slid into a 20-month recession when the tax was raised from 3 percent in 1997 as consumer spending cooled and the Asian Financial Crisis crimped demand.
The legislation, which proposes raising the levy to 8 percent in 2014 and then to 10 percent the following year, has a non-binding stipulation that higher taxes will only be introduced if economic circumstances have improved. Economists surveyed by Bloomberg News predict gross domestic product growth will decelerate next year from this year’s pace as reconstruction demand from last year’s earthquake fades.
A tax increase will be a “major step forward” to get the country closer to the government’s goal of eliminating a budget deficit by 2020 and regain trust in Japan’s fiscal condition, even though the Cabinet Office has already projected the proposed increases alone won’t be enough to attain the goal by that year, said Morinobu.
The government’s goal of balancing the budget “must be achieved at all costs because it’s a crucial step to halt the expansion of outstanding public debt,” he said.
Japan should also avoid depending on sales tax increases alone to reduce public debt and instead it should consider broadening the taxable income brackets and reducing or eliminating deductions such as those for pensioners and spouses, he said.