Noda Administration May Be Planning to Use Sales Tax Proceeds for Large Public Works Projects

Liar, liar, pants on fire!

The Noda administration has successfully pass the legislation to increase Japan's sales tax from current 5% to 8% (then to 10%) with the help of the opposition parties, and the ostensible reason was to "reform and improve the public safety net".

It was BS as it stood, because the money will be taken from the very people Prime Minister Noda says he wants to help. Now, according to Tokyo Shinbun, the administration has much better use of the money that they will have: public works.

Ah. Good old trusty public works that have never succeeded in lifting Japan from the two-decade-long economic stagnation (dubbed "Lost Decades") but have helped in keeping the biggest general contractors in business.

But if you read the article, it's totally illogical. It goes like this:

1. Let's raise sales tax, everybody pays this tax for everything they buy.

2. Lots of money will fill the government coffer. No need to issue government bond to pay for the social services any more!

3. So, the debt (government bond) not issued (because the sales tax covers the cost, supposedly) is the new money created! (No it is not, but you can't argue with politicians.)

4. Let's spend that "money" on public works!

Only in the last bastion of John Maynard Keynes.

My quick translation of the Tokyo Shinbun article (7/30/2012):

A curious discussion has been going on in the Upper House special committee on the simultaneous reform on social security and taxation. The main topic of the discussion is whether to use the extra breathing space from the sales tax hike in public works. All of the money from the tax increase is supposed to be used in providing social security. But if we listen to the discussion, it is almost like "simultaneous reform on taxation and public works".

In the committee meeting, the Councilors from Democratic Party of Japan (DPJ), Liberal Democratic Party (LDP) and Komei Party keep repeating, "We should increase the budget for public works because the public works protect the life and living of the citizens." The basis of their argument is the revised regulation that the three parties agreed on in June, "Addendum 18 Item 2".

It says, "Considering the effect of the sales tax hike on the economy, the fund will be specifically allocated to the growth strategy and areas like disaster prevention and disaster mitigation."

If the sales tax is raised to 10% and additional 13.5 trillion yen is in the government coffer, that will decrease the amount of government debt to pay for the social security. So why not use this extra spending power [what's "extra" about this?] in public works for disaster prevention and such? That seems to be their thinking. Prime Minister Yoshihiko Noda is sympathetic to the idea, saying "If the economy grows and tax revenue rises, disaster prevention and disaster mitigation will be the priority for added funds."

The government has been explaining that the purpose of sales tax hike is to achieve both the reform on social security and the fiscal reform simultaneously.

Money is fungible, but if the money from the tax hike is diverted to public works, the fiscal reform will be delayed, and additional tax hike may become necessary. What is the point of the sales tax hike then?

The point of raising sales tax is, because they can, and they want to look good in the eyes of IMF. And because the citizens have long been pushovers (and the foreign residents have no say).

If the economy grows? PM Noda expects the economy to grow by raising tax for the constituency that has no power - individual taxpayers. Japan's large exporters will benefit from the sales tax hike, and they will receive extra credits. I suppose Mr. Noda is not counting on the Japanese citizens and residents to spend money to expand the economy.

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