Japan Votes Against Consumption Tax Hike

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

31 July 2007

Japanese Prime Minister Shinzo Abe's plans for fiscal and tax reform have been dealt a blow after the opposition Democratic Party, which opposes a hike in consumption tax, won a substantial majority in Upper House parliamentary elections on Sunday.

While the Democrat Party's victory does not give it control over the government, analysts expect their influence in the upper house to raise a barrier to an early rise in consumption tax - thought to be central to the ruling Liberal Democrat's plans to raise the revenue it needs to meet growing spending requirements and balance the budget. It was thought the government would legislate to increase the tax in 2008, with the hike going into effect in 2009, but this is now an increasingly distant prospect.

Not only is the Japanese government pondering how to pay for the costs of an ageing society, it is also struggling to tackle a mountainous debt which, at 148% of GDP, is the highest in the industrialised world.

However, despite the electoral setback, Abe resolved to forge ahead with fiscal reforms. "The (election) result shows the road ahead is tough, but Japan can no longer survive without reforms," he told a news conference on Monday.

Prime Minister Shinzo Abe is attempting to follow through on a pledge to balance the budget by 2011, but the government has been vague on its tax and spending plans for fear of losing popularity. However, with pension provision expected to keep rising, and with the government planning to increase the amount it contributes to the social security pool from 2009, tax hikes were expected to come in 2009/10.

Japan's consumption tax rate remains at one of the lowest rates among the thirty members of the OECD, and supporters of a hike argue that there is room for an increase in the rate to 10%, noting that this will still be much lower than consumption taxes in other major economies, especially in Europe, where such taxes typically range between 15% and 20%.