Oct 02, 2013

    Japan raising sales tax to 8% to rein in debt

    JAPANESE Prime Minister Shinzo Abe took a step yesterday that none of his predecessors had managed in more than 15 years - making a dent in the government's runaway debt.

    Mr Abe, riding a wave of popularity with economic policies that have begun to stir the world's third-biggest economy out of years of lethargy, said the government will raise the national sales tax to 8 per cent in April, from 5 per cent.

    But, at the same time, he will soften the blow to the nascent recovery. As the tax increase is set to raise an additional 8 trillion yen (S$102 billion) a year, he will also announce an economic stimulus package worth 5 trillion yen or more.

    The tax increase marks the first serious effort since 1997 to rein in Japan's public debt, which recently blew past 1,000 trillion yen. At more than twice the size of the economy, this is the heaviest debt load in the industrial world.

    Japan's budget deficit is around 10 per cent of GDP, huge for a country not in financial crisis. The debt pile grows every year by nearly the size of the combined GDP of Greece, Portugal and Ireland.

    Yet, successive governments have done little to rein in spending and Mr Abe is watering down the impact of the tax hike, so some critics doubt yesterday's move will be enough.

    "Even if Abe's policies go well, we still will not eliminate the primary budget deficit," said senior Standard & Poor's official Takahira Ogawa. "It will just slow the pace of growth in outstanding debt and slow the pace of budget-deficit growth, but things would still be deteriorating."