Japan's DPJ Issues Its Fiscal Proposals

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

24 June 2010

New Japanese prime minister Naoto Kan has edged his Democratic Party closer towards necessary fiscal tightening in advance of the July 11 upper house elections, with the publication of his party's 'fiscal management strategy' and the promise of 'comprehensive tax reform' to be decided in the near future.

The plan seeks to outline a medium-term strategy to limit new debt starting in the next fiscal year with a cap of JPY44 trillion (USD486bn) and steadily decreasing caps for subsequent years. Without incorporating tax increases in the plan, the projections showed that tight spending restraints alone would result in a reducing debt to GDP ratio after 2021/22. However the budget deficit could be more than halved by 2015.

The nature of tax increases become a subject of debate in the run-up to the elections, and already the opposing parties are seeking to capitalize on the electorate's scepticism about tax increases as a means to tackle rising public debt. The Japanese economy has been in the doldrums for twenty years and various attempts to raise consumption tax have failed amid fears that it would stifle growth. In 1997, premier Ryutaro Hashimoto was able to force through a modest rise in sales tax to 5%, but this was blamed for depressing growth.

In various pronouncements on tax since his taking over as prime minister, Mr Kan has suggested that a doubling of the consumption tax to 10% would be a basis for debate with the electorate and the opposing parties, but some economic commentators, including the IMF, advocate higher sales tax rates, with stepped increases up to as high as 20%.

Last weekend a Kyodo news poll suggested a third of the 400 or so candidates running for the July 11 Upper House elections would support raising the consumption tax to 10%.

An Asahi Shimbun editorial said that Kan had shown exceptional enthusiasm about tackling the nation's fiscal woes by indicating his willingness to consider raising the consumption tax to 10%.

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