Raising the Consumption Tax: An Imperative Task

On January 13 Prime Minister Noda Yoshihiko reshuffled his cabinet, replacing five of the seventeen incumbent ministers. Those replaced included Defense Minister Ichikawa Yasuo and National Public Safety Commission Chairman Yamaoka Kenji, both of whom had been censured by the opposition-controlled upper house late last year. Noda also bid farewell to Justice Minister Hiraoka Hideo, who was expected to come under fire from the opposition in this year’s ordinary session of the National Diet. But the decision to remove Nakagawa Masaharu from his position as minister of education and replace him with Hirano Hirofumi is a riddle. Perhaps Noda was seeking to maintain harmony among competing camps within the ruling Democratic Party of Japan by giving Hirano a cabinet post. But why was Nakagawa the one to go? This choice is especially puzzling since Nakagawa had been quietly but effectively demonstrating strong political determination in tackling such issues as university reform, the development of global human resources, and the construction of an “East Asia Science and Innovation Area.”

The highlight of the cabinet reshuffle, as has been widely noted, was the appointment of Okada Katsuya, former secretary general of the DPJ, as deputy prime minister and minister for social security and tax reform. With this move Prime Minister Noda reinforced his cabinet’s readiness to pursue a hike in the consumption tax. Noda has indicated his determination to increase the rate of the tax, declaring that it will be necessary to ask the public to make sacrifices. And in late December he secured formal approval from the DPJ for a plan to raise the consumption tax from its current level of 5% to 8% in April 2014 and to 10% in October 2015. This is designed to provide the necessary funding for public pensions and other social security programs.

In a nationwide telephone poll conducted by the Yomiuri Shimbun on January 13–14, immediately after the reshuffle, 39% said they approved the proposed consumption tax hikes, and 55% were opposed. A survey by the Asahi Shimbun produced slightly more negative results: 34% in favor and 57% opposed. No tax hike is ever going to get more supporters than opponents. What is more significant is that in this case more than a third of the public approves the proposal.

Diet Session to Focus on Consumption Tax Hike

This year’s ordinary Diet session convened on January 24. The first issue on the legislative agenda is the budget for fiscal 2012 (April 2012 to March 2013). But as soon as that is out of the way, the focus will be firmly on the government’s consumption tax proposal. Given the parlous state of Japan’s public finances, a tax increase is imperative—not increasing the tax is not an option, whatever excuses may be put forward. I hope that not only the government and the DPJ but also the opposition Liberal Democratic Party and New Kōmeitō will show resolve, look at the big picture, and move to address this issue positively.

By way of reference, the government’s proposed initial budget for fiscal 2012 assumes total revenues of ¥90.3 trillion, including ¥42.3 trillion from taxes and ¥44.2 trillion from bond issues. On the expenditure side it provides for ¥21.9 trillion in debt service costs, ¥26.4 trillion in primary-balance social security spending, and ¥23.1 trillion in policy-based spending for items like education, promotion of science, and national defense. In other words, the cost of maintaining the existing social security system exceeds the total of all these policy appropriations within the primary balance. And the costs of social security will necessarily continue to grow as Japan’s population ages; if the current system is kept in place, the costs will rise at a rate of about ¥1 trillion a year.

Under the proposed budget, the national debt will reach 219.1% of gross domestic product in 2012. This ratio of debt to GDP is much higher than that of Italy (128.1%), which is now experiencing a fiscal crisis. People often note that Japan has a huge store of personal financial assets; as of 2010 these totaled ¥1,115 trillion. But general government debt that year reached ¥1,048 trillion, and given the growth of the outstanding debt balance and the decline in the saving rate, the debt total is likely to outstrip personal assets within the next few years. We also hear the argument that the size of government debt is not important as long as the nominal rate of economic growth is higher than the nominal rate of interest. This is quite true. But this criterion was satisfied in only three years from 1991 to 2010. And economic growth tends to be slower in countries with debt-to-GDP ratios above 90% than in those with lower loads of fiscal debt. Meanwhile, last year Japan’s trade balance fell into the red by a margin of ¥2.5 trillion. The strong yen put a crimp on exports, and the nuclear disaster in Fukushima led to a sharp increase in imports of liquefied natural gas as a substitute fuel for thermal power generation. The balance of trade will probably continue to be in deficit in the years ahead, while the surplus in the income balance (¥11.7 trillion in 2010) is likely to shrink given the state of the global economy. Under this combination of factors, the current account may well fall into deficit around 2015.

In this light, it is clear that the only way to deal with Japan’s current fiscal crisis is through the combined reform of social security and taxes—and that we have little time left to act. Last November the International Monetary Fund came out with these words of warning about Japan’s public finances: “Once confidence in sustainability erodes, authorities could face an adverse feedback loop between rising yields, falling market confidence, a more vulnerable financial system, diminishing fiscal policy space and a contracting real economy.” The Noda administration’s ability to maintain “confidence in sustainability” of Japan’s debt is now being tested.

Political Will in Science and Technology Policy

The government’s Council for Science and Technology Policy, of which I am a member, has been temporarily out of operation since January 6. This is because the extraordinary Diet session last fall ended without taking up the proposed nominations of three candidates for seats as expert members of this council, including Osaka University President Hirano Toshio. The council, chaired by the prime minister, is the government’s “control tower” for science and technology policy, drafting basic policy proposals and undertaking overall coordination. The composition of its membership is determined under the Cabinet Office Establishment Act, which stipulates that it will have up to fourteen members, consisting of cabinet members and executive members (experts from academia and industry). The act also stipulates that the executive members should make up at least half the total. But on January 5, with the end of the terms of three of the incumbent executive members, the total membership fell to eleven, including just five executive members; the council thus became unable to function legally.

If the appointments are confirmed by the Diet now that it is back in session, the council will be able to resume its normal operations. But I would like to note one point that is probably not widely appreciated: The political will of the prime minister is vital to the council’s work. The council is described as the “control tower” for science and technology policy, and the current administration has been preparing a proposal for reorganizing it so as to strengthen its role. But no amount of fiddling with the organizational structure will make any difference unless the prime minister has the will to use the council. One might compare it to a car—however fine the vehicle, it cannot go anywhere without somebody in the driver’s seat.

I believe there is a broad national consensus on the importance of promoting scientific and technological innovation and developing the human resources vital for Japan’s future. But Noda’s DPJ predecessors, Prime Ministers Hatoyama Yukio and Kan Naoto, showed very little commitment to this cause, even though they were both former science majors. This can be seen clearly from the frequency and length of the meetings of the “control tower” council during their time in office. Under Prime Minister Koizumi Jun’ichirō (2001–6), the council met on average once every 37 days, and its meetings averaged 55 minutes. Under Hatoyama (2009–10) the average interval was 53 days and average duration 37 minutes. And under Kan (2010–11) the council met only once every 113 days for 27 minutes on average. Whatever these former prime ministers may say, it is clear that they had little interest in science and technology policy. Would it be going too far to suggest that the Noda administration’s failure to secure confirmation of the new council members before the end of last year’s Diet session indicates a similar lack of commitment?