Revised use for tax hike revenue a tactic by Finance Ministry to prevent third delay

Prime Minister Shinzo Abe has proposed to redistribute part of the additional proceeds from a planned 2019 consumption tax hike toward education for smaller children — a move orchestrated through six months of tactical lobbying by Finance Ministry executives eager to prevent a third postponement of the tax hike, informed sources have said.

Even after the sweeping victory in last month’s House of Representatives election, however, Abe has not ruled out the possibility of another delay in the event of an economic crisis, creating a sense of unease within the fiscally conservative ministry.

It was April when a senior Finance Ministry official called on Chief Cabinet Secretary Yoshihide Suga at the Prime Minister’s Office. Suga listened intently to the official, who briefed him on a proposal to divert more of the additional tax revenue to child care and education, according to the sources.

At the time, there was active discussion within the ruling Liberal Democratic Party on whether to provide a wider range of free education and how to finance such a program. Funding proposals included a “child insurance” program and so-called education bonds.

According to the law on the consumption tax increase, which took effect in 2012 when the government was led by the then Democratic Party of Japan, most of the revenue from the hike is supposed to be used to reduce debt from bond issuance.

But around the same time the ministry official met Suga, some members of the main opposition Democratic Party also were proposing using the additional revenue from the tax hike for educational purposes.

Carefully watching the debates in the ruling and opposition parties, a small group of senior officials at the Finance Ministry began considering diverting the proceeds from the tax hike to other uses. The idea was a surprise card played by officials who were well aware that doing so would mean ditching the goal of generating a primary budget surplus by fiscal 2020. A surplus means that a government can finance its spending on policy measures, except for debt-servicing costs, without issuing new debt.

After raising the consumption tax rate from 5 percent to 8 percent in April 2014, the Abe administration delayed the second increase to 10 percent twice, saying the economy was too weak to withstand the hike. Currently, the government is slated to boost the levy in October 2019.

The ministry’s scenario of achieving the tax hike in exchange for allowing more of the revenue to be used for child care and education became a real possibility in June.

After his public approval ratings took a dive amid cronyism allegations, Abe rolled out a new policy initiative of a “revolution” in human resources development and started studies in full scale on details, including free preschool education.

To finance the proposal, senior administration officials told the Finance Ministry’s top bureaucrats to flesh out the proposed revision by year’s end, the sources said.

The instruction set off informal discussions in the ministry. It was something out of the blue for the ministry’s tax bureau, which is tasked with issues related to the consumption tax, but no vocal objections were raised since it had been endorsed by the Prime Minister’s Office, according to the sources.

Abe hopes to push ahead with fiscal reconstruction by promoting economic growth and was cautious about a tax increase in the first place. So Abe and Suga have harbored ill feelings toward Finance Ministry officials, who they considered to be too preoccupied with fiscal concerns.

The proposal from the Finance Ministry was aimed at securing at least one of two goals — balancing the budget and raising consumption tax to 10 percent.

The proposal also reflected their hope of repairing relations with the Prime Minister’s Office by supporting Abe’s education policy.

Things started moving quickly in September, when Abe made up his mind to dissolve the Lower House for a snap election, aiming to take advantage of a fractured opposition camp. He ordered the Finance Ministry to come up with new ways of using the additional tax revenue to fund free education at a wider range of institutions.

The ministry supported the outline of Abe’s policy package of about ¥2 trillion despite the lack of details. This is the amount of money needed for a large-scale policy, a senior ministry official said.

Abe has been cautious, however, in committing to the tax hike.

“It is not the case that it (the consumption tax rate) will be raised regardless of economic conditions,” he said on Sept. 26. “I will need to make a decision in the event of a (economic) contraction comparable in scale to the Lehman Shock.”

Abe made similar remarks on Oct. 22 after pulling off the election landslide.

“We’ll lose everything if we can’t gain a firm commitment (from Abe) on the tax hike,” a Finance Ministry official said, echoing a concern that has been smoldering within the ministry.

If the tax hike to 10 percent is deferred while the free education plan is implemented anyway, government finances will inevitably face sharp deterioration.

One senior ministry official now appears to regret a plan promoted with a small group of colleagues. “I’m wondering why things have gone this way,” the official said.

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