JAPAN - Prime Minister Shinzo Abe has nearly resolved to raise the consumption tax rate from 5 per cent to 8 per cent in April as initially planned, government sources said Wednesday.
The tax hike will be complemented by a set of pump-priming measures worth about ¥5 trillion (S$63,700)-equivalent to about two-thirds of the revenue anticipated from the three percentage-point increase-to prevent the economy, which has been gradually improving, from taking a downturn due to the higher tax.
The economy-boosting measures will be made possible through such steps as drafting a supplementary budget for the current fiscal year and a regular annual budget for fiscal 2014 in a manner that will enable each to complement the other. This will also be combined with tax system revisions that will primarily feature tax reductions, according to the sources.
The prime minister will likely make a final decision about the envisaged tax increase after analysing the Bank of Japan's quarterly survey of short-term business outlook for September. The central bank will announce the results of the Tankan business confidence survey on Oct. 1. Immediately after arriving at a final conclusion on the matter, Abe is expected to hold a press conference to explain why the consumption tax rate must be raised and unveil the new economy-boosting package.
A one percentage-point increase in the consumption tax rate is expected to generate ¥2.7 trillion in government revenue. The prime minister fears the improving economy could take a downturn if the public is forced to shoulder a fresh financial burden of about ¥8 trillion as a result of a three percentage-point tax hike, according to the government sources.
To prevent this, Abe decided that the possible negative impact on the economy due to the tax rate increase must be reduced to a level comparable to the burden that would be shouldered by taxpayers if the rate was raised by one percentage point. The prime minister believes this could be accomplished through an economic stimulus package that would, in effect, repay taxpayers money nearly equivalent to the revenue collected through a two percentage-point increase in the tax rate, the sources said.
On Tuesday, the prime minister met with Deputy Prime Minister Taro Aso, who concurrently serves as finance minister; Akira Amari, state minister for economic revitalization; and Chief Cabinet Secretary Yoshihide Suga. Abe told them about his idea and instructed them to put together economy-boosting measures as soon as possible.
On Monday, the Cabinet Office said gross domestic product increased by an annualized 3.8 per cent during the April-June quarter, up from 2.6 per cent in its preliminary figures.