Japan Passes Second Reconstruction Budget

by Mary Swire, Tax-News.com, Hong Kong

28 July 2011

The Japanese parliament has passed the JPY2 trillion (USD25.6bn) second supplementary budget to finance immediate reconstruction needs after the earthquake and tsunami in March, with support from both the governing and opposition parties.

The budget largely uses additional and unexpected tax revenue collected in the last fiscal year, and follows a first supplementary 2011 budget, amounting to JPY4 trillion that was passed in early May this year and was able to be mainly financed from the government’s emergency reserves.

It has been fortuitous that, so far, the government has been able to avoid a decision on whether the bulk of the reconstruction costs should be funded from either tax increases or bond issues, or a mixture of both. A larger supplementary budget of some JPY10 trillion, to take care of the bulk of the country’s remaining reconstruction and rehabilitation efforts, is still being delayed in the face of such doubts over its financing.

While the government and the ruling Democratic Party of Japan (DPJ) fear the possible political backlash from future tax rises, the recommendation made, at the end of last month, by the Reconstruction Design Council that the government should issue reconstruction bonds to finance the next budget is gaining more credence.

It is reported that the existing plan is for reconstruction bonds to fund the third supplementary budget to be issued over a five-year period. Those special bonds would be drawn to coincide with reconstruction needs during that period, and their servicing and repayment would be linked to a temporary increase in a mix of the country’s ‘core taxes’ – presumably, consumption, individual income and corporate taxes.

Those plans are complicated by the recommendation of another panel established by Kan to work on proposals to finance the rapidly-rising costs of pensions and health care in Japan, which has also suggested that Japan’s consumption tax should be raised in stages by 2015.

While the opposition parties supported the second supplementary budget, any increase in taxes to finance a larger budget would be unlikely to achieve the same agreement, particularly if Naoto Kan was to remain as Prime Minister.

In fact, Kan, under pressure from both the opposition and some of his ‘colleagues’ in the DPJ, has indicated that he will resign as soon as, after the second supplementary budget, parliament approves the annual budget which would allow the government to issue bonds to cover the country’s fiscal deficit. For that to happen, it is likely that the parties will agree to an income limit on child allowances to unfreeze the current deadlock.

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