S&P says Japan needs to raise tax revenue with sales tax hike

TOKYO: Japan needs to use a planned increase in its sales tax to boost government revenue and lower its outstanding debt burden, ratings agency Standard & Poor´s said on Friday.
Exempting some food items from a tax increase scheduled in 2017 could prove a positive step by making it easier for voters to accept higher taxes, KimEng Tan, S&P´s Asia-Pacific senior director of sovereign ratings, said in an interview.
However, tax exemptions will pose an administrative cost to companies and the government as they have to decided which items to exempt and set up a system to deal with multiple tax rates, Tan said.
"The important thing is the sales tax must bring in revenue to bring down debt level," Tan said."Exempting some items from the sales tax hike is not unusual, but any time you exempt something, you make it more expensive to enforce the system."
S&P last month cut its rating on Japan from AA- to A+, which is four notches below its top rating of AAA, because it doubts the government's will reverse economic deterioration. The agency raised its outlook to stable from negative. The stable outlook means Japan's rating is unlikely to change for the next one to two years, but S&P will review it annually, Tan said.Japan's government plans to raise the nationwide sales tax to 10 percent from 8 percent in 2017 to pay for rising welfare spending, and Prime Minister Shinzo Abe wants to exclude some food from this tax hike to help low-income households.
Abe´s government aims to return to a primary budget surplus in fiscal 2020 and then lower the debt-GDP ratio, the world´s worst, at around twice the size of Japan's $5-trillion economy.
It is important for the government to meet this target and encourage strong economic growth to boost tax revenues, Tan said.
Abe also plans to lower the corporate tax rate to spur companies to invest more, but Tan expressed doubt this would work because large companies already have a lot of savings. Japan´s consumer prices have started falling recently, partly because of lower oil prices, but the government needs to ensure a moderate level of inflation, as this implies more economic activity, making it easier to cut the debt burden, Tan said.