Shinzo Abe’s tax hike gamble

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Shinzo Abe’s sales tax hike is seen as a political and economic gamble but it is a necessary measure that will allow Japan to get its economy back on track.

Shinzo Abe Prime Minister of Japan
The Prime Minister of Japan, Shinzo Abe

It seems that the much acclaimed Abenomics has managed to achieve another milestone with the passing of a national level sales tax. The Japanese prime minister has been successful in initiating a national sales tax which has not been done in the last 15 years and has proved to be the first step in Japan ‘s quest for a balanced budget.

The election of Shinzo Abe was hailed as a drive towards economic growth and stability and this is one step in the right direction for the country as a whole.

A positive impact against the country’s profligate government spending and on the deficits it has accumulated is now expected. With the contribution of 8 trillion yen in new tax receipts, the government can flex its fiscal muscle during the present time of need. With more flexibility, the government is better equipped to carry out future economic stimulus packages. That the corporate sector will see some amount of pressure on account of the new tax, must still be assessed, but a sales tax hike seems to be in the future. Since 1997 that the country has tried many times with varying degrees of success, to curb its spending and raise revenue to counter its high expenditure levels. The deficit currently at 10 percent of GDP is proving to be a weight on the economy as more debt is piled on each passing year.

Japanese economy snapshot 2013 courtesy of The Economist Economic Intelligence Unit, Global Debt Clock

  • Public debt of: $12,450,557,103,825
  • Public debt per person: $98,978.03
  • Population: 125,797,267
  • Public Debt as a percentage of GDP: 233.1%
  • Total annual debt change: -1.4%

The sudden tax hike is not welcomed by all stakeholders and efforts are underway to water down the hike. Even though the impact can be dampened down later, politicians against the plan are acting now. The watering down won’t help to fill the revenue gap that exists in the Japanese economy and more measures will still be required to curb the deficit.

The sword hanging over Japan is a ratings downgrade over the coming months if the deficit is not addressed properly.

Abe’s measures continue to face stiff opposition, even from people within his own party, but the decisiveness of his actions are seen as the strong initiative that Japan needs. Experts have commended Abe on his determination and commitment and there is a sense that a bitter pill must be swallowed sooner rather than later, and that he was always the best man for the job. Japan has been plagued with slow growth and deflation for 15 years and the responsibility falls to him to use the fiscal and monetary tools he has at his disposal to put Japan’s finances on a sustainable track.

Deflation is seen as a priority by his administration but a need to balance economic growth and fiscal responsibility makes for a difficult balancing act. Doubling the consumption sales tax is the most feasible thing to do at this point and it shouldn’t discourage consumption while collecting more revenue for the government — but it remains to be seen if the economy can sustain it.

Indicators released last month point to favorable economic winds of change for Abe’s plan, but more analysis of the possible social, economic and political ramifications may be needed, prior to implementation.

History is not on Abe’s side, as the last tax hike in1997 was followed by a deep recession in Japan and was the reason behind the fall of Ruytaro Hashimoto, the last premier to increase tax revenues.

Abe is trying to circumvent the fall in productivity by funding stimulus packages to supplement private investment in the economy.

Japan’s rapidly aging population and a lack of people to take their places adds economic pressure on the thinning work force. In addition, public sector benefits place a huge strain on the country’s expenditures, representing a growing proportion of government spending.

© Zain Naeem

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