Editorial: Japan's tax reform outline fails to address concerns over consumption tax cut

The Japanese government has unveiled a tax reform plan focused on reducing the consumption tax, aiming to lower the rate for food items from 8% to 1% starting in April 2027. However, the plan has been criticized for not addressing key concerns. The biggest issue is the lack of clarity on funding, as the tax cut will require around 5 trillion yen ($32 billion) annually, yet the government insists it will not rely on deficit financing through government bonds.

If the government plans to rely on its election promise and ignore fiscal responsibility, it risks being irresponsible. The plan also includes measures to support the food service industry and farmers, but without a clear path to fund these expenditures, the fiscal burden could increase. Furthermore, the two-year limit on the sales tax cut's validity is questionable, as raising the tax rate would essentially be a significant tax increase.

To mitigate the tax cut's impact, benefits for low- and middle-income earners are postponed until April 2029, after the tax cut ends. While the tax reduction applies to all citizens, the accompanying benefits are limited and may not fully alleviate the burden. The timing of the election in 2028 could make it difficult to raise taxes, as public finances have become a growing concern in financial markets.

The government's request for fiscal 2027 budget allocations has also spiked, with long-term interest rates surpassing the 3% mark for the first time in three decades. Elevated interest payments on government bonds could deteriorate public finances and weaken the yen, potentially triggering inflation. The government's decision to combine tax cut and benefit measures into a single bill may be an attempt to gain support from opposition parties in the upper house, where the ruling parties hold a minority position.

While opposition parties oppose the tax cut, they have shown acceptance of the benefits. However, the tax cut primarily benefits higher-income earners, making it unfair to demand lawmakers to vote for or against these measures as a package. The Diet should not be swayed by such a manipulative approach and should engage in open debate.

As the consumption tax is a crucial revenue source supporting growing social security costs, using it for short-term economic stimulus could create problems for a super-aged society. Ultimately, politics must look toward Japan's future and pursue sustainable policies.