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Japan Approves Additional Reconstruction Budget

by Mary Swire,, Hong Kong

07 July 2011

Prime Minister Naoto Kan’s government has issued a second supplementary budget to finance reconstruction in Japan following March’s earthquake and tsunami, largely using additional and unexpected tax revenue collected in the last fiscal year.

A first supplementary 2011 budget, amounting to JPY4 trillion (USD49.4bn), was passed in early May this year, but, with the total damage caused by the disaster (excluding that caused by the Fukushima nuclear power plant) estimated at some JPY17 trillion, the government had indicated that a further large supplementary budget of at least JPY10 trillion, to take care of the bulk of the country’s reconstruction and rehabilitation efforts, would be announced last month.

However, that was delayed, largely by the Japanese government’s inability, in the face of parliamentary opposition, to decide on how to provide for the large amount of funds required – whether by the issuance of bonds, increased taxes, or a mixture of both. Both the government and the ruling Democratic Party of Japan fear the possible political backlash from future tax rises.

In that regard, at the end of last month, the Kan-appointed Reconstruction Design Council recommended that the government should issue reconstruction bonds for a limited, as yet unspecified, period, with their repayment linked to a temporary increase in a mix of the country’s ‘core taxes’ – presumably, consumption, individual income and corporate taxes.

At the same time, another panel established by Kan to work on proposals to finance the rapidly-rising costs of pensions and health care in Japan, has also recommended that the country’s consumption tax should be raised in stages by 2015.

It is therefore, perhaps, somewhat fortuitous that Kan has been able to provide immediate funds for urgent reconstruction measures through a JPY2 trillion supplementary budget that will involve neither tax increases nor bond issues, but will, it is said, be mainly financed from the unexpected increase to total tax revenues in the fiscal year that ended in March this year.

It was only in the last few days that the Ministry of Finance disclosed that it had collected some JPY1.85 trillion more in tax revenues than had been previously forecast. Total revenues of nearly JPY41.5 trillion in the 2010-11 fiscal year reached over JPY40 trillion for the first time since the onset of the global economic recession two years previously.

Even though Kan remains under extreme political pressure, with the timing of his resignation being openly debated, it is likely that the opposition parties will be unwilling to defeat a budget that, in effect, uses existing fiscal resources for reconstruction that is urgently needed. Consequently, it is expected that the new budget may well be able to pass through parliament later this month.

TAGS: tax | economics | sales tax | fiscal policy | law | budget | legislation | tax reform | Japan

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