Abandoning Tax Hike

According to news reports, Prime Minister Shinzo Abe seems to have decided not to raise consumption tax rate from current 8% to 10% in next October. He is supposed to announce the timing to be one and a half year later, or April of 2017. The basic recognition is that Japanese economy after raising the rate from 5% to 8% this April has been too weak to withstand further taxation. But, 10% tax was already legislated before Abe took his seat of the Premier. After all, escaping from tax hike means the failure of Abenomics.

According to Mainichi Shimbun, Abe consulted with Secretary General of Liberal Democratic Party, Sadakazu Tanigaki, about the decision of tax hike last Friday. Against Tanigaki’s suggestion that tax hike should be raised as planned, Abe revealed his intention to postpone the timing of tax hike. “I need to explore the timing of dismissing the House of Representatives,” told Abe, indicating his determination to have election.

Abe has been saying that he would decide whether tax hike should be done or not after watching gross domestic products in the third quarter of this year. It has been discussed that the stats must be so terrible that Abe had no choice except avoiding further negative impact on economy. His economic advisers have also been negative for raising consumption tax rate until economy would regain good health. But the decision may generate antagonism in Ministry of Finance, which has been counting on new revenue resource.

One obvious thing is that Abe did not have a gut for believing in resilience of Japanese economy. Closely watching the economic situation after this April, he thought further taxation would fundamentally damage Abenomics, which was aimed for getting rid of deflation. “It is hard for economy to raise consumption tax rate two times in a short period,” revealed Abe to his aids in the leading parties.

Postponing consumption tax hike will cause various troubles in fiscal policy. The target of generating fiscal primary balance by 2020 will be doubted internationally. Total sum of governmental debt, both nationally and locally, already exceeded ¥1 quadrillion. Although MoF argues that cutting welfare expense is indispensable, politics has been reluctant to do that. 10% tax has already been built in economy policies.

Consumption tax hike was regarded as an important measure for maintaining the level of social welfare service. Nevertheless, Abe administration wasted money too much in building infrastructure up. The fact is that economy has not been recovered by positive investment on traditional interests. It makes no sense for the government to attribute their failure to the increase of social welfare, which has well been predicted.