Japan panel urges governemnt to impose delayed sales tax hike to balance budget

Reuters
FILE PHOTO: A shopper is seen between price boards outside a discount clothing retail store at a shopping district in Tokyo, Japan, April 28, 2015. REUTERS/Yuya Shino

TOKYO (Reuters) - Japan must not delay a sales tax hike scheduled for October 2019 as the revenue is needed to cover bulging social security costs and achieve the target of balancing the budget in four years, an advisory panel to Finance Minister Taro Aso said on Thursday.

The Fiscal System Council made the proposal to the minister and called for fiscal reform to stabilise Japan's fragile economy and mitigate risks.

The council is headed by Sadayuki Sakakibara, the chairman of Keidanren, Japan's biggest business lobby.

With Japan's public debt more than double its $5 trillion economy, the finance ministry hopes the proposal will be reflected in mid-year policy guidelines to be drawn up by Prime Minister Shinzo Abe's top economic advisory panel.

Abe has twice delayed the planned tax increase to 10 percent after the 2014 hike to 8 percent from 5 percent hurt consumers and tipped the world's third largest economy into a recession.

The delays fuelled doubt about Abe's resolve on fiscal reform, while central bank's massive government bond purchases keep government's borrowing costs low.

SUGGESTION REBUFFED

The fiscal council rebuffed a suggestion by some academics that Japan should put into practice a theory that price levels should be set by fiscal policy, which is aimed at accelerating inflation through expanded government spending.

"We're unsure whether government bonds can win trust once Japan gives up fiscal discipline despite its public finances being the worst among advanced countries." the report noted.

"There's no change to our stance to squarely tackle spending reform, raise the sales tax as promised and achieve in fiscal 2020 a primary budget surplus" excluding new bond sales and debt servicing.

On Wednesday, former Federal Reserve chairman Ben Bernanke said in Tokyo the Bank of Japan may need to coordinate a fiscal spending plan with the government, allowing for inflation to accelerate above 2 percent without worsening the debt burden.

The Cabinet Office estimates Japan's primary deficit will be 8.3 trillion yen (57.3 billion pounds) in the year ended March 2021 even assuming rosy growth projections, suggesting more efforts are needed to raise tax revenue and curb welfare spending to balance the budget.

(Reporting by Tetsushi Kajimoto; Editing by Richard Borsuk)