Japan's First Emergency Budget Approved

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

04 May 2011

The Japanese government’s first supplementary 2011 budget to take care of the country’s initial reconstruction and rehabilitation efforts after last month’s earthquake and tsunami has been passed in parliament, with the support of opposition parties.

Some of the funds for the interim budget are to be obtained by raiding the government’s emergency reserves, but the bulk of the money will come from taking JPY2.5bn (USD30.7m) from pension fund reserves, and jettisoning the planned increase in child allowances and cancellation of road tolls.

The support of the opposition parties, which is needed by the government in the parliamentary upper house, was forthcoming for the initial emergency effort of clearing damaged buildings and construction of temporary shelters, probably because the first supplementary budget does not contain any politically contentious proposals.

No indication has yet been given on the government’s final thinking of how revenue could be raised to fund a second, and larger, supplementary budget, which will be necessary given that the total damage is estimated at some JPY25 trillion. However, when that budget is finally unveiled, it is likely to contain both new bond issuance and new taxes. Any such proposal has, so far, brought out strong political opposition.

While, in recent days, there has been continued talk of an increase to the country’s consumption tax to provide the bulk of the necessary funds, it is widely expected that at least part of the revenue will also need to be found by government bond issuance. With Japan’s present public debt totalling around twice the size of its economy, it has been suggested that, if new government bonds are issued, they could be attached to repayment from specific revenues.

Prime Minister Naoto Kan remains extremely weak politically, with continued calls from the opposition parties for his resignation. In consequence, while details of the second supplementary budget had been expected to be given next month, the government has not yet provided a timetable for its consideration in parliament and it could, therefore, be delayed.

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