Kan Considers Japan's Second, Larger Reconstruction Budget

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

27 April 2011

Following the announcement of Japan’s first JPY4 trillion (USD48.75bn) supplementary 2011 budget, Prime Minister Naoto Kan has turned his thoughts to how his government plans to finance the country’s reconstruction and rehabilitation after the estimated JPY25 trillion damage caused by last month’s earthquake and tsunami.

Given the size of Japan’s public debt at around twice its gross domestic product, the financial markets appeared to be pleased that the government had not, in the first supplementary budget, announced any new bond issuance. However, in recent comments, Kan has now confirmed that a second, more substantial, budget, which could be formulated in June this year, would necessitate government bond finance.

The question being asked now, therefore, is how far the amount of new bond issues in the next budget can be reduced by the imposition of new taxes. However, there still appears to be little sign of any agreement on the source of such additional tax revenues.

While the first budget does not contain any politically contentious proposals, Kan has recognised that there will need to be a wide discussion if the government decides that Japan needs to raise consumption tax, or introduce other tax measures, to levy revenue from the public.

It has been reported that the government’s panel of experts, which is looking at a possible package of measures to finance reconstruction, is considering raising the consumption tax rate from the present 5% to 8% (or even, according to some commentators, to 15%) to provide the bulk of the necessary funds.

While recent polls have suggested that taxpayers would be willing to accept additional taxation as an emergency measure, possibly for a fixed period of three years, tax increases would be politically difficult for Kan, who has been weakened further in recent local elections. He faces opposition parties who have shown little inclination, to date, for compromise, and who are looking for his immediate resignation.

Recommended