In What Case a Tax-Hike is Acceptable?

(TAKAHASHI Yoichi, PPPC Chairman)

My prediction in the previous column (Experts’ Meeting on Tax-Hike and Possibility of Snap Election) seems to have been right. At the moment, many media rumor a schedule of Lower House dissolution on November 19 (taian) – election on December 14 (tomobiki).

It is needless to say that Prime Minister has the exclusive authority over Lower House dissolution, so we have to wait for Prime Minister Abe to come back from his trip abroad. But Nagata-cho has already been busy preparing for a next election and it seems to be difficult to hit brakes to the momentum.

In any case, GDP in the July-September quarter, whose first flash will be released on November 17, will greatly attract the public attentions. Assuming that the consumption tax rate is to be really hiked to 10 percent, how much GDP should be attainable?

Let’s try some calculation. The real GDP (annual base) in the January-March and April-June quarters in 2014 was respectively 535.0 trillion yen and 525.3 trillion yen. There was a dashing-on demand in the January-March quarter before the tax-hike and the April-June quarter saw a decreased demand as its reactionary effect.

If there wasn’t the tax-hike to 8% in this April, there should have been around 2% of growth in both the Jan-Mar and Apr-Jun quarters compared to the previous year. To note, both the July-September and October-December quarters in 2013 had actually witnessed 2.4% of positive growth. If that was the case, the real GDP in the Jan-Mar and Apr-Jun quarters should have been, respectively, 531.5 trillion yen and 536 trillion yen. It means that the dashing-on demand before the tax-hike amounted to 535 trillion (the actual rate) - 531.5 trillion (supposed rate) = 3.5 trillion yen. The same amount would have been decreased in the Apr-Jun quarter as its reactionary effect. Yet, more than that, the whole GDP rate has been decreased by 7.3 trillion yen, which should be considered as the negative economic effect of the consumption tax hike in April.

Dashing-on Demand and its Reactionary Effect, Income Decrease by the Tax-Hike

(Chart: drafted by PPPC)

This negative effect of the tax-hike should be continuing to the same extent in the Jul-Sep quarter. The GDP should have been 538.4 trillion yen if not for the tax-hike, but it will possibly be around 531.1 trillion yen smaller than that by 7.3 trillion yen for the negative effect of the tax-hike. Although the rate is still smaller than the rate which should have been gained, those in favor of the tax-hike will likely OK the number which is +4.5% from the previous quarter. To repeat, those in favor of the tax-hike will admit another tax-hike to 10% if the GDP in the Jul-Sep quarter is to be announced as around +4.5%.

Of course, such a rate is not at all permissible to the author having voiced avoiding the tax-hike. The author cannot agree with the tax-hike unless the GDP in the Jul-Sep quarter amounts to 538.4 trillion yen which should have been gained if not for the tax-hike plus +2% from the same quarter in the previous year. It is equivalent with +10% from the previous quarter.