As countermeasures against high prices and Trump's tariffs, both the ruling and opposing parties are discussing cutting the consumption tax.
Specifically, there is a proposal for a temporary consumption tax cut on food at its currently reduced rate of 8% down to 5% or even to zero, for example until March 2027. Furthermore, some argue that the consumption tax should be reduced to 5% uniformly, not limited to food, or abolished entirely.
In the first place, limiting tax cuts to temporary measures could be difficult. Considering that a consumption tax hike was postponed twice in the past, considerable political energy would surely be required to return to the higher consumption tax rate once it had been reduced.
On the other hand, Japan’s outstanding government debt has exceeded 1,000 trillion yen, and interest rates of government bonds are on a rising trend that is partly due to a change in monetary policy. If interest payments increases with no prospect for a primary balance surplus, the national fiscal situation would deteriorate even further. If market confidence in Japanese government bonds is damaged, there is a risk of causing a sharp increase of interest rates.
If that were to occur, social security could become unsustainable amid the current population aging. Prime Minister Ishiba has also taken a cautious stance, saying "consumption tax is an important source of funds for supporting a social security system that accommodates the needs of all generations.
Therefore, if the consumption tax is to be cut, alternative sources of funds would be required. However, regarding such funding sources, some insist on thorough expenditure reform (“smart spending”) and corporation tax hikes, while others present optimistic prospects that a tax cut will naturally boost the economy and increase tax revenue, or that deficit-covering government bonds should be issued without hesitation while disregarding the financial conditions of the treasury.
The future is uncertain, but politicians now seem to be focusing on the House of Councilors election to be held this summer, instead of the future of Japan. While advocating for the necessity of economic policies that include all possible options, such as a cash handout and tax cut, in reality, these are simply election strategies. Short-sighted economic policies, which are often ridiculed as “tax cut populism,” may have lasting negative consequences.
What are the alternatives to tax cuts?
A cash handout and tax cut for expanding consumption would be effective as fiscal policy measures under a deflationary trend. However, the Japanese economy turned inflationary some time ago. Even if consumption is boosted by a tax cut, it will only accelerate price increases unless production volume expands. If so, as fiscal policy measures, priority should be placed on the restoration of the production capacity through such means as the enhancement of labor productivity to compensate for labor shortages.
There is also concern that exports could decline due to Trump's tariffs. Some expect that an increase in domestic consumption will make up for a decrease in exports, but approximately 30% of exports to the United States (to the value of approximately 6 trillion yen) are related to automobiles. Regarding agricultural, forestry and fisheries products and foodstuffs, for which a tax cut has been discussed, export value is no more than 200 billion yen, although their export to the United States has been increasing in recent years.
Therefore, it would be preferable to provide emergency support to exporters while simultaneously promoting cultivation of new markets and a structural shift, including a shift of business types (with the anticipation that high US tariffs will continue for the time being).
Needless to say, behind the so-called "tax-cut populism" lies the dissatisfaction of citizens, especially among the working population. If the goal is to support low-income workers, it would be more beneficial for the government to reduce social insurance premiums, which place a heavy burden on them. One option is a cash handout to subsidize part of the social insurance premiums. This would serve as more direct support than consumption tax cuts, and could lead to the creation of a future safety net for the working population.
>> Original text in Japanese
* Translated by RIETI.
May 5 / May 17, 2025 Weekly Toyo Keizai
