March 29, 2018 / 10:34 AM / a year ago

Japan government lays groundwork for more stimulus spending to offset tax hike

TOKYO (Reuters) - Japan’s government began laying the groundwork on Thursday for big spending next year to offset the impact of a planned nationwide sales tax hike.

FILE PHOTO: A Japan Yen note is seen in this illustration photo taken June 1, 2017. REUTERS/Thomas White/Illustration/File Photo

The government should manage fiscal policy to prevent growth from collapsing and should keep the impact of past sales tax hikes in mind when it compiles the fiscal 2019 budget, a mid-term report presented at the government’s top advisory panel showed.

The government also conceded on Thursday that it will miss a fiscal discipline target for fiscal 2018, which starts on April 1, due to a dip in tax revenue and past stimulus spending.

Prime Minister Shinzo Abe’s cabinet is likely to adopt the report’s advice on fiscal policy, setting the stage for another year of big spending that many policymakers say is needed to prevent growth from slowing.

“It is undeniable that past tax hikes had affected the economy, so we need to be mindful of the lessons from the past when managing future fiscal policy,” Japanese Economy Minister Toshimitsu Motegi said after the meeting of the advisory panel.

The government is scheduled to raise the nationwide sales tax to 10 percent from 8 percent in October 2019. A similar hike in 2014 from 5 percent caused a big decline in consumer spending and tipped the economy into recession.

Some policymakers say the sales tax increase in 2014 also made it more difficult for the Bank of Japan to meet its 2 percent inflation target.

The chance of another huge budget or a new stimulus package for the fiscal year starting in April 2019 could raise some concerns about fiscal discipline.

The ratio of the primary budget deficit to gross domestic product (GDP) is expected to reach 2.9 percent in fiscal 2018, Motegi said on Thursday, which is worse than the government’s goal of 1.0 percent.

Originally, the government had a goal of swinging to a primary budget surplus in fiscal 2020, but now that this is unachievable, the government will come up with new fiscal discipline targets by June, Motegi said.

Japan’s outstanding public debt burden is the worst in the world at more than twice the size of its economy.

Since taking office in late 2012, Abe has made some progress in raising tax revenue and lowering new debt issuance, but many economists worry this progress is not enough to control the debt burden.

On Wednesday Japan’s parliament passed a record 97.7 trillion yen ($917.28 billion) state budget for next fiscal year, which starts on April 1.

The budget features a large welfare outlay to respond to a fast-ageing population and a record military outlay to cope with regional tension related to China and North Korea.

($1 = 106.5100 yen)

Reporting by Stanley White; Editing by Kim Coghill

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