New Kan Government Could Act Sooner On Tax

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

15 June 2010

Although Japan's new Prime Minister Naoto Kan has announced that fiscal reform is necessary to slow down and reverse the massive growth in the country's public debt, and the national strategy minister said that details would be published by June 22, doubts remain as to whether the new government, formed after Yukio Hatoyama's resignation, will bite the bullet and announce an increase in the 5% sales tax, which the new prime minister himself advocated in his former capacity as finance minister.

"It is difficult to sustain fiscal policies based on the issuance of government bonds," said Kan, "Like the confusion in the eurozone triggered by Greece, our finances could collapse if trust in national bonds is lost and growing national debt is left unattended."

According to Reuters, there will be a medium-term fiscal plan which commits to caps on spending for the state budget over the next three years, together with a set of longer-term targets to bring the primary balance into surplus.

After a Nikkei newspaper report that claimed the deficit would be brought into surplus by March 2021, Finance Minister Yoshihiko Noda said this was "clearly wrong" and that the plans had not yet been finalized.

Economic commentators had been looking for a surplus to be brought into being much sooner - perhaps as early as five to seven years from now. Kan's pronouncements since becoming prime minister have been limited to policy objectives bringing about an average 2% growth through to 2020.

After almost two decades of fiscal stimulus and low tax receipts, the five previous prime ministers in the last four years have failed to address the issue of higher sales tax in spite of the exhortations from the likes of the OECD and IMF that this measure was the most straightforward way to raise tax receipts. Japan's 5% sales tax rate on items including clothes and food is among the lowest in the developed world. Nevertheless at election times, the parties have hampered their scope for action by committing not to raise the rate.

Ahead of upper house elections planned for July 11, Kan risks making himself very unpopular with the electorate with his fiscal plan announcements later this month, but, as he has stated himself, his credibility and the credibility of all Japan in the backdrop of anxious international capital markets is at stake.

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