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Japan says it needs consumption tax rate of 17 percent to cover social security costs

By Hideo Kamata, The Yomiuri Shimbun –

TOKYO — The government and ruling parties of Japan have described the planned increase in the consumption tax rate as a “first step” because they have deemed that the boost to 10 percent will not fully cover the shortfall in social security revenue, making a further hike unavoidable in the future.

In their draft outline of integrated reform of the social security and tax systems, compiled Friday, the rate hike to 10 percent is said to be “the first step to simultaneously achieve the goals of securing stable revenue sources for financing social security and regaining governmental fiscal health.”

If the consumption tax rate is raised from the current 5 percent to 10 percent, the central and local governments will rake in a total of about 13.5 trillion yen more in annual revenue.

The additional revenue will be used to cover costs in four fields of social security — pensions, medical care, nursing care and measures to cope with the low birthrate.

If the rate is raised to 10 percent in October 2015 in line with the draft outline, revenues from the consumption tax in fiscal year 2015 will be about 24 trillion yen — both for the central and local governments — because the rate will be hiked midway through the fiscal year.

According to estimates by the Health, Labor and Welfare Ministry and other entities concerned, the total cost in the four social security fields in fiscal 2015 for both the central and local governments will be 37 trillion yen.

This would leave the government 13 trillion yen short.

From fiscal 2016 on, revenues from the consumption tax will be about 27 trillion yen a year, but that will still mean a shortfall of about 10 trillion yen.

The shortage will be even greater from fiscal 2020, when costs in the four social security fields will surge to 42.7 trillion yen.

The government has set a goal of bringing the primary fiscal balances of the central and local government into the black in fiscal 2020. If the consumption tax rate is 10 percent in fiscal 2020, it will be 18.3 trillion yen short of that goal.

To cover the shortage through consumption tax revenue alone, the tax rate will need to rise to 17 percent.

With an eye to raising the consumption tax rate further in the future, the government and ruling parties said in the draft outline that “subsequent reform will be implemented.”

However, it is uncertain whether it will be easy to implement “subsequent reform.” At a press conference Friday, Finance Minister Jun Azumi said, “We still haven’t been able to gain the public’s consent for (the increase to) 10 percent.”

Asked about an additional rate hike in the future, Azumi only said that was “a mid- to long-term task.”

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