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Achieving fiscal health seems distant despite planned consumption tax hike

The extra revenue that will be gained from the planned hike in the consumption tax from 8 percent to 10 percent will go toward funding services such as pensions, health care and child-rearing support. However, it seems unlikely that the rise will lead to Japan achieving fiscal health.

Some of the additional money will be allocated toward paying off Japan's national debt, in order to stabilize the country's social security system. However, Prime Minister Shinzo Abe apparently intends to use some of the new revenue to fund free education -- making the objective of achieving fiscal health seem far away.

In 2012, when the country was governed by the Democratic Party of Japan (DPJ), the predecessor of the Democratic Party, the DPJ agreed with the Liberal Democratic Party (LDP) and Komeito that the consumption tax would be raised gradually to 10 percent. Subsequently, in April 2014, the rate was increased from 5 percent to 8 percent. Looking ahead, the rate is set to rise again to 10 percent in October 2019, having already been postponed twice by Abe.

By increasing the rate from 5 percent to 10 percent, the extra revenue of about 14 trillion yen (about $125.5 billion) is expected to be allocated as follows: 3.2 trillion yen toward basic pensions, 2.8 trillion yen toward bolstering social security and 800 billion yen toward funding increased social security spending. In addition, 7.3 trillion yen is planned to go toward paying national debt, which is about twice the amount for the social security related items. This allocation ratio is applied to budget appropriation under the current rate of 8 percent.

Furthermore, the Abe administration plans to proceed with making child care and education for young children free of charge. However, how to fund the annual 700 billion yen said to be required for these areas has yet to be decided.

Within the LDP, a "child insurance" concept that is funded by companies and company employees has been proposed but it has been met with resistance from the private sector, and is expected to be difficult to adopt. The amount of money required to fund free higher education is even higher than that for young children. Therefore, the way in which the consumption tax can be used has been re-evaluated.

If the amount used for paying Japan's national debt is reduced, it will have a negative effect on the country's goal of achieving fiscal health. The government has set a goal of obtaining a primary balance surplus in fiscal 2020. However, with the Cabinet Office estimating a primary balance deficit of 8.2 trillion yen in fiscal 2020, it appears difficult for the government to achieve the fiscal health goal.

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