Japan to exempt some food from sales tax hike, sparks worries about debt

[TOKYO] Japanese Prime Minister Shinzo Abe ordered his ruling party on Wednesday to devise a plan to exempt some food items from a sales tax hike in 2017, which could hamper the government's efforts to lower its gigantic pile of public debt.

The government will raise the nationwide sales tax to 10 per cent from 8 per cent in April 2017 to pay for rising welfare spending, but politicians are worried about the economic impact after a sales tax hike last year helped trigger a recession.

Low-income households have been cutting back on spending, so reduced tax rates would be a big relief. However, the lost tax revenue could undercut moves to lower Japan's debt burden, which is the worst among advanced economies.

Daiju Aoki, economist at UBS Securities, said that given the costs small businesses would face from having to deal with different tax rates, the negatives from introducing such a system "outweigh the positives over the long term".

Also, he said, "revenue from the sales tax tends to be very stable, but when you introduce exemptions this makes revenue more volatile." Members of the ruling Liberal Democratic Party will soon start meeting to decide the details of the scheme, which is likely to be similar to multiple value-added tax rates found in many European countries.

Many households have been struggling with a rise in imported food prices due to a weak yen, so lower tax rates on food could support consumer spending and sentiment.

Increasing the nationwide sales tax to 10 per cent from 8 per cent could boost tax revenue by around 5 trillion yen (S$58 billion), but the government could lose up to 1 trillion yen if it exempts some food from the higher tax rate, UBS's Aoki said.

The government will be tempted to subsidise some of the administrative costs of the scheme for small companies, which would burden public finances further, Aoki said.

Ratings agency Standard & Poor's downgraded Japan's sovereign debt rating last month by one notch to A+, which is four rungs below the top rating, because it doubted that the economy will grow fast enough to boost tax revenue.

Japan's public debt is around twice the size of its US$5 trillion economy, but successive governments have made only limited progress in curbing spending and new borrowing.

REUTERS