Japan's Tax Panel Tightens The Purse Strings

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

20 November 2009

The Japanese government's tax policy panel has rejected almost half the requests from industry for tax exemptions in 2010 as the government seeks to consolidate its budget and find money for its other tax and spending priorities.

According to the Japan Times, Prime Minister Yukio Hatayama's tax advisory panel has decided to reject 93 out of 198 requests by central government offices for tax breaks for designated industries. It is believed that this could free up about JPY300bn (USD3.4bn) in additional revenues for the government to either spend elsewhere in an attempt to stimulate the economy, or use to reduce the budget deficit, which is nearing 10% of gross domestic product (GDP).

Hatoyama's government has already decided to cancel an economic stimulus plan approved under the previous administration of Prime Minister Taro Aso, giving the current government another JPY3 trillion to spend in a supplementary budget which could be approved by the end of this year and may contain some of the tax cuts and new spending commitments announced prior to the August election.

Hatoyama has pledged that the government would provide "direct support" for household finances by establishing a child allowance, and abolish the provisional rates of taxes on petrol. The DPJ has also proposed tax breaks for people buying homes with cash, a cut in corporate tax for small companies, and a freeze on the 5% consumption tax for five years.

Despite rare optimism over the prospects for the Japanese economy, which is showing signs of emerging from recession, tax revenues have collapsed in recent months as companies book their losses and receive refunds from the government. Finance Ministry officials revealed to Bloomberg news that tax revenues may be JPY8 to JPY9 trillion lower this fiscal year than the government has forecast.

Nonetheless, Japan's Finance Minister Hirohisa Fujii on November 19 told Angel Gurria, the Secretary General of the Organization of Economic Cooperation and Development (OECD), that he is confident about the state of the Japanese economy going into 2010, although Gurria said the previous day that Japan’s fiscal situation "creates concern," as the ratio of public debt to GDP is already the highest ever recorded in the OECD area.

"With a budget deficit approaching 10% of GDP, public debt is on track to rise even further to over 200% by 2011," Gurria remarked in a speech in Tokyo. "A key to solving the fiscal problem is economic growth; increasing GDP, in part by ending deflation, would reduce the burden of debt," he added.

The Japanese government projects that, all things being equal, 40% of the population would be over age 65 by 2025. Gurria warned that this implies "a significant increase in the burden on the working-age population to pay for public spending on pensions, health and long-term care."

This is likely to put upward pressure on taxes, and may force the government to raise the rate of consumption tax, currently 5%, whether it likes it or not.

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