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Japanese Budget Squeeze Hits Local Tax Grant Payments

by Mary Swire,, Hong Kong

10 September 2012

Japan's Finance Minister Jun Azumi has disclosed that the government will have to delay programmed tax grants to local authorities in the country, due to a cash shortage as its debt-issuance bill continues to be blocked in parliament.

A political deadlock has arisen after Prime Minister Yoshihiko Noda had to promise that he would dissolve the lower house “soon” or “in the near-term”, and call for elections which are not actually due until August next year, in order to push through the government’s plan to increase consumption tax from its present rate of 5% to 8% in April 2014, and again to 10% in October 2015.

He has, however, now found that he no longer has the support of the opposition parties in the upper house that is needed to pass any subsequent government bills in the current legislative session, which ends on September 8, as those parties press for him to dissolve the lower house and call for the promised election.

In particular, the special bill to approve the issue of additional government bonds is falling foul of the opposition boycott. Such bonds are needed to finance around 40% of the country’s fiscal budget, and it has been forecast that, without it, the government could run out of revenue by late October.

Azumi had already had to announce that, if the bill failed to be enacted by September 8, he would have to decide what spending should be delayed in order to make ends meet, and, as a first move, has decided to delay the payment of JPY4.1 trillion (USD52.3bn) of tax revenue grants due to local authorities.

In addition, he has disclosed that, unless the bill is passed, the government will shortly decide on how further spending can be postponed given the limited funding it will receive. It has been indicated, for example, that the government could continue to pay the tax grants due to those municipalities that rely heavily on them, while delaying further payments to the others who do not, as well as some payments due to universities and government-controlled companies.

However, it has been stressed by the Finance Ministry that government bond repayments and interest payments on outstanding public debt will not be affected, as they are made using reserves set aside for the purpose.

Some commentators now believe that, while the bond-issuance bill may well be approved at a special parliamentary session that could be called next month, it would be at the cost of Noda fixing an election date.

TAGS: tax | economics | sales tax | fiscal policy | law | capital markets | budget | ministry of finance | legislation | tax rates | Japan

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