Japan panel urges government to impose delayed sales tax hike to balance budget

[May 25, 2017]  By Tetsushi Kajimoto

TOKYO (Reuters) - Japan must not delay a sales tax hike scheduled for October 2019 as the revenue is needed to cover bulging social security costs and achieve the target of balancing the budget in four years, an advisory panel to Finance Minister Taro Aso said on Thursday.

The Fiscal System Council made the proposal to the minister and called for fiscal reform to stabilize Japan's fragile economy and mitigate risks.

"The sales tax hike must be implemented. It is Japan's international commitment and indispensable to bring the primary budget into the black," said Sadayuki Sakakibara, council head and the chief of Keidanren, Japan's biggest business lobby.

Failure to meet the target could hit Japan's sovereign credit ratings, he added.

With Japan's public debt more than double its $5 trillion economy, the finance ministry hopes the proposal will be reflected in mid-year policy guidelines to be drawn up by Prime Minister Shinzo Abe's top economic advisory panel.

Abe has twice delayed the planned tax increase to 10 percent after the 2014 hike to 8 percent from 5 percent hurt consumers and tipped the world's third largest economy into a recession.

The delays fueled doubt about Abe's resolve on fiscal reform, while central bank's massive government bond purchases keep government's borrowing costs low.

SUGGESTION REBUFFED

The fiscal council rebuffed a suggestion by some academics that Japan should put into practice a theory that price levels should be set by fiscal policy, which is aimed at accelerating inflation through expanded government spending.

Chairman of Japan Business Federation (Keidanren) Sadayuki Sakakibara attends a news conference in Tokyo, Japan, January 23, 2017. REUTERS/Toru Hanai

"We're unsure whether government bonds can win trust once Japan gives up fiscal discipline despite its public finances being the worst among advanced countries." the report noted.

"There's no change to our stance to squarely tackle spending reform, raise the sales tax as promised and achieve in fiscal 2020 a primary budget surplus" excluding new bond sales and debt servicing.

On Wednesday, former Federal Reserve chairman Ben Bernanke said in Tokyo the Bank of Japan may need to coordinate a fiscal spending plan with the government, allowing for inflation to accelerate above 2 percent without worsening the debt burden.

The Cabinet Office estimates Japan's primary deficit will be 8.3 trillion yen ($74.37 billion) in the year ended March 2021 even assuming rosy growth projections, suggesting more efforts are needed to raise tax revenue and curb welfare spending to balance the budget.

($1 = 111.6100 yen)

(Reporting by Tetsushi Kajimoto; Editing by Richard Borsuk)

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