Noda Looks For A Bipartisan Tax Consensus

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

01 September 2011

It appears that latest Japanese Prime Minister Yoshihiko Noda will persist with the tax-raising stance he took when Minister of Finance in the previous Kan government, in order to resolve Japan’s reconstruction and budget deficit problems.

During Naoto Kan’s premiership, the government operated a medium-term policy target of halving Japan’s primary budget deficit (excluding interest payments) to approximately 3% of GDP by 2015, by the primary means of doubling consumption tax to 10% in stages, the timing of which would be determined by the strength of future growth in the domestic economy.

However, with the ruling Democratic Party of Japan (DPJ) fearing the possible political backlash from future tax rises, decisions on the much-discussed funding, whether by increased taxes and/or further bond issuance, of the country’s reconstruction following the March earthquake and tsunami were still awaited.

The Reconstruction Design Council has recommended that the government should issue, over a five year period, reconstruction bonds to finance a third supplementary budget. Those special bonds would be drawn to coincide with reconstruction needs during that period, and their servicing and repayment would be linked to a temporary increase in a mix of the country’s ‘core taxes’ – presumably, consumption, individual income and corporate taxes.

Kan, however, faced implacable parliamentary opposition from the Liberal Democratic Party (LDP) that is able to block legislation, and it was only after he agreed to resign, and the DPJ diluted its proposals to increase child tax allowances, something that had been part of its campaign pledges in the 2009 elections, that the LDP approved the passing of legislation to permit the necessary increase of government bonds to cover around 40% the country’s budget deficit in the current fiscal year.

It therefore now remains to be seen whether, as the new Prime Minister, Noda will have more success than Kan in agreeing a way forward with the leaders of the LDP in resolving the above issues. Apart from uniting a fractious DPJ, he will need to provide an answer on how to break the deadlock with the LDP in parliament.

Noda has, at least begun the process by saying that he will immediately initiate bipartisan discussions in order to determine whether the parties can work together. Most commentators, however, appear to believe that Noda and the DPJ’s only chance of a way forward relies on a political calculation by the LDP on whether it could succeed on an anti-tax platform if it forced early elections.

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