THE last time any politician dared to raise Japan's unpopular consumption tax, people were beginning to use something called e-mail, the craze for Tamagotchi pets was spreading, and the economy was almost five times the size of China's.
It was 1997, and Ryutaro Hashimoto, then prime minister, wanted to rescue the public finances. The economy weakened sharply after the tax increase, and Mr Hashimoto was gone soon afterwards. That memory hangs over the decision this week by Shinzo Abe, the prime minister, to raise the consumption tax from its current level of 5% to 8% next April (see article). He is expected to raise it to 10% 18 months later. Not surprisingly, Mr Abe's people blew hot and cold for months about whether he should endorse the rise. Now that he has done so, his backers are claiming that his move will come to be seen as a turning-point for Japan's troubled finances. The gross national debt stands at well over 200% of GDP, the highest ratio in the rich world. Since the country's financial and property bubbles burst in the early 1990s, government spending has leapt, while tax revenues have stagnated.
The splurge was driven partly by Keynesian attempts to end Japan's slump. But spiralling health and pension costs also had much to do with it-and, with a rapidly ageing society, they have a lot further to climb. Welfare-related spending now consumes almost a third of the general budget, about double the proportion in 1990. Against this background, a modest rise in the consumption tax ought scarcely to be an issue. In fact, the consumption tax probably needs eventually to go up to 20%-ie, to European levels-if Japan is ever to have a hope of stabilising its finances.
The trouble has always been a fragile, stop-start economy. The political class has long been haunted by the experience of 1997, though the Asian financial crisis raging at the time surely also played its part in the recession. This time, though, things are different. An increase in the tax has been in the political works for years. Postponing it would have shattered any credibility Mr Abe claimed for fiscal discipline, while undermining his argument that his programme of "Abenomics" to get the economy moving again is working.
Source: The Economist
