EDITORIAL: Consumption tax hike

Prime Minister Naoto Kan has shown a laudable commitment to sorting out the nation's fiscal mess by signaling his readiness to raise the consumption tax rate to 10 percent.

But as yet, he has not offered a clear-cut plan to accomplish his goal.

Now that the issue of raising the consumption tax rate has emerged as a major campaign topic for the Upper House election in July, we hope Kan will explain to voters how he intends to use the new revenue.

Tuesday's election debate among the leaders of the nine parties focused on the consumption tax issue.

Kan said he would use the fresh money to improve funding for social security programs.

"Since the revenue from the consumption tax is not enough to fully finance social security, we are currently covering the revenue shortfall by issuing deficit-financing bonds. As this situation will eventually lead to financial collapse, I would use (the new money) to make up the shortfall," he said.

The other party leaders criticized Kan for his comment. One said Kan's explanation was at odds with earlier remarks in which he promised to use the additional tax to finance the state pension program. Another leader called Kan's explanation insufficient.

Kan gave responses that were either half-baked or off the mark. For instance, he said using taxpayer money for nursing care services would create jobs. Kan needs to offer a more polished performance in future debate on the issue. On the campaign trail, he needs to outline his plan for raising the consumption tax rate, including the use of new tax receipts. He needs to talk in plain language and make an all-out effort to win public support for his proposal.

Especially important will be his explanation of how the consumption tax increase ties in with his vision of "a strong economy, strong public finances and strong social security."

He needs to articulate a strategy that will use the tax increase not only to trim the towering budget deficit but also to bolster the social security system in a way that doesn't choke future economic growth. Kan has argued that it is possible to raise a tax without knocking the economy off its growth track and set a target of nominal economic growth at an average annual rate of 3 percent.

But he needs to offer a more specific blueprint for economic expansion to win public support for his policy vision. For instance, voters deserve to hear much more detail about how he thinks it is possible to use the new revenue to create new jobs, increase wages, improve services and foster faster growth in the area of nursing care. He also must provide a clear road map on the use of new tax revenue to restore state finances to fiscal health.

On Tuesday, the Kan Cabinet endorsed the government's new strategy for fiscal management, which defines basic policies for financial rehabilitation for the period through fiscal 2020, and a medium-term fiscal policy framework for the next three years.

Under the strategy, the government will try to reduce the primary budget deficit--the fiscal deficit minus interest payments--to half the current level in terms of its ratio to gross domestic product in fiscal 2015. The ultimate goal is to turn the primary deficit into surplus in fiscal 2020.

The government has also decided to cap general-account expenditures of the central and local governments at 71 trillion yen ($785 billion)--the figure for the current fiscal year--until fiscal 2013 and put a ceiling slightly in excess of 44 trillion yen on the amount of new government bonds issued.

A new rule included in the strategy requires the government to find new money or scrap an existing program when it launches a new one.

But the most important element, a plan to achieve the goals, is missing. Kan pledged not to raise the consumption tax rate for the next two or three years, at least.

Still, he should at least map out a rough plan to accomplish the target of halving the primary deficit in fiscal 2015.

Financial market players around the world who are becoming increasingly worried about possible defaults by countries with massive budget deficits, not to speak of Japanese voters, are waiting for Kan's political decision based on solid and reliable plans for curing the nation's fiscal ills.

--The Asahi Shimbun, June 23