October 15, 2018 / 7:39 AM / a month ago

Japan PM Abe pledges to go ahead with sales tax hike next year

TOKYO (Reuters) - Japanese Prime Minister Shinzo Abe on Monday pledged to go ahead with an increase in the national sales tax next October.

Abe said the government will consider tax breaks for durable goods purchases, such as cars and homes, and come up with a scheme to ease the burden on small companies and small retailers once the sales tax is raised to 10 percent from 8 percent.

The government will exempt food from the tax hike, but there are still lingering concerns that higher taxes will hurt consumer spending and curb economic growth.

“We are scheduled to raise the sales tax to 10 percent from 8 percent in October 2019,” Abe said, according to a statement.

“We have to face the problems caused by our ageing society and build a welfare system that is fiscally sound.”

The government needs extra tax revenue to pay for ballooning healthcare costs for its rapidly ageing population.

Japan has the world’s largest debt burden, at more than twice the size of its $5 trillion economy, leaving its public finances in a precarious position.

However, even the slightest increase in tax rates can have deep and long-lasting consequences for Japan’s price-conscious households.

In addition to food, the government will exempt sold beverages from the tax increase, meaning retailers can continue to sell these goods at the current 8 percent tax rate.

The tax on most goods will rise to 10 percent, so retailers will have to deal with the burden of managing multiple tax rates.

The government will use half of the revenue generated from the tax hike to subsidize education costs, Abe said in the statement.

Earlier on Monday, the government approved 936 billion yen ($8.38 billion) extra budget for reconstruction following a strong earthquake in the northern island of Hokkaido and severe flooding in western Japan.

Abe’s decision on the tax hike comes amid increasing concern that the trade war between the United States and China will hurt the global economy.

The prime minister has twice postponed the tax hike after the last increase, to 8 percent from 5 percent in 2014, dealt a blow to private consumption, which accounts for about 60 percent of the economy.

FILE PHOTO: Japanese Prime Minister Shinzo Abe attends the joint news conference of the Japan-Mekong Summit Meeting at the Akasaka Palace State Guest House in Tokyo, Japan October 9, 2018. Franck Robichon/Pool via Reuters

“This tax hike is only 2 percentage points, but we have to use our experience from the previous tax hike and make every effort to ease the impact on the economy,” he said.

Abe has entered his final three-year term in office after he won a ruling party leadership vote last month, putting him on track to become Japan’s longest-serving premier.

($1 = 111.7000 yen)

Reporting by Stanley White; Editing by Chris Gallagher and Richard Borsuk

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