Japan’s Social Security at Crossroads with Consumption Tax Cut

Tokyo, Aug. 6 (Jiji Press)–A planned consumption tax cut in Japan will require the government to secure alternative revenue sources to cover costs related to social security measures. But no specific ways to make up for the expected loss of revenue have yet to be found. Revenues from the consumption tax are important financial resources to cover public pension payments, medical expenses and other social security costs. The government of Prime Minister Sanae Takaichi decided Wednesday a plan to cut the consumption tax rate for food from 8 pct to 1 pct for two years starting in April 2027 as a measure to mitigate the impact of rising prices in the country. The government also plans to provide low- and middle-income people with cash benefits equivalent to the amount of revenue from a 1 pct consumption tax rate for food, in order to effectively reduce the tax to zero. The total fiscal costs for the food tax cut and cash benefits are seen reaching about 5 trillion yen a year. “We will fully work to prevent social security measures from being affected” by the scheme to effectively lower the food tax rate to zero, Takaichi told reporters Wednesday. Possible alternative revenue sources will include surpluses from the government’s foreign exchange special account and nontax revenues such as partial contributions of the Bank of Japan’s profits. Finance Minister Satsuki Katayama said the same day that the government will step up efforts to find additional revenue sources. She also vowed to review existing subsidies and special tax incentives, and promote the reform regarding state budget compilation. But it has already been decided that part of the foreign exchange account surpluses will be used for measures to beef up the country’s defense capabilities. It would be difficult for the foreign exchange account surpluses and BOJ contributions alone to fully make up for the revenue drop from the consumption tax cut and the costs for the cash benefits, informed sources said. The tax reduction and cash benefits are designed as stopgap measures until the planned full-scale introduction of an income-linked benefit program in fiscal 2029. Meanwhile, there are strong concerns about whether the food consumption tax rate can be brought back to 8 pct after the two-year period of reduction. Finding a permanent revenue source in place of the consumption tax for the full-fledged cash benefit program will likely be an extremely difficult task. Another issue is that the effect of the food consumption tax reduction will be greater for people with higher incomes. According to a government estimate, the food consumption tax burden totals 46,000 yen a year for people annually earning 2 million yen or less and 88,000 yen for those with annual incomes of 15 million yen or more. No solution has been worked out for this problem. Katayama said that it will likely take until December, when work to compile the fiscal 2027 state budget is seen making major progress, for the government to find alternative revenue sources to cover the de facto zero consumption tax scheme for food. “I would like to think more than ever before about communicating with financial markets” in order to prevent turmoil in the markets, the finance minister said. END [Copyright The Jiji Press, Ltd.]