November 20, 2018 / 12:30 AM / a month ago

Japan MOF urged to implement sales tax hike, prevent downturn

TOKYO (Reuters) - A panel advising Japanese Finance Minister Taro Aso urged the government on Tuesday to go ahead with a planned sales tax hike next October, taking all steps needed to prevent a downturn while also avoiding fiscal expansion.

FILE PHOTO - Japanese Deputy Prime Minister and Finance Minister Taro Aso looks on during Prime Minister Shinzo Abe and U.S. Vice President Mike Pence's joint news announcement in Abe’s official residence in Tokyo, Japan November 13, 2018. REUTERS/Issei Kato

The proposal, made in recommendations from the Fiscal System Council, is the basis for debate on the fiscal 2019 budget to be drafted by the Ministry of Finance (MOF) in December.

Prime Minister Shinzo Abe, who has resorted to a mix of easy money policy and flexible fiscal spending to boost growth, faces pressure from within his ruling bloc to spend more on areas such as public works as elections next year draw closer.

Abe has vowed to hike the nationwide sales tax to 10 percent from 8 percent in October 2019 as planned, barring an economic shock, to meet the cost of social welfare as part of a plan to achieve Japan’s elusive balanced-budget goal in fiscal 2025.

The government is considering measures to ease the pain from the tax hike, ranging from tax breaks on car purchases and housing mortgages to shopping vouchers to stimulate consumption.

“Prime Minister Abe told us to take all possible steps to support the economy and avoid cooling domestic consumption,” Aso told reporters after a cabinet meeting.

The premier also instructed Aso to compile a second extra budget to meet urgent needs such as boosting public works to protect against disasters, helping farmers cope with a Trans-Pacific Partnership (TPP) trade deal, and backing small firms.

“The (offsetting) measures must be effective and efficient in the way that won’t cause an expansion of public finances,” the MOF panel said in recommendations.

The offsetting measures will be featured in fiscal 2019’s initial budget spending, expected to top 100 trillion yen ($887.55 billion). The offsets could also expand Japan’s public debt, already the industrial world’s heaviest at more than double gross domestic product.

The initial budget for the current fiscal year amounts to 97.7 trillion yen, with social security and debt-servicing accounting for more than half the overall spending plan.

The MOF panel stopped short of setting a numerical target for the annual increase in social security spending, raising doubts about the government’s resolve to rein in bulging welfare costs associated with an aging population.

Previously, the government set a 500 billion yen cap for the annual increase in social security outlay.

The MOF panel said the government had to keep welfare spending in line with higher costs brought on by aging.

“We must achieve reform without loosening our grip on fiscal consolidation,” it said.

Reporting by Tetsushi Kajimoto, editing by Eric Meijer

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