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Japanese Government Puts Forward Huge Reconstruction Budget

by Mary Swire,, Hong Kong

11 October 2011

The Japanese government has agreed a further JPY12 trillion (USD156.2bn) budget, including proposals for taxation increases, to be presented to opposition parties and parliament for the financing of reconstruction costs in the earthquake and tsunami-hit north-east of Japan.

Following a first JPY4 trillion reconstruction budget in May this year and a second of JPY2 trillion in June, the government’s tax panel had recommended last month that a third, largest, budget to fund the bulk of the reconstruction costs should consider various tax-raising options – in particular, increases to individual and corporate income tax rates, hikes to excise taxes on tobacco, and/or the raising Japan’s consumption tax rate.

However, Japan’s Prime Minister Yoshihiko Noda immediately ruled out the option of raising the current 5% consumption tax rate without an electoral mandate. In any case, gradual consumption tax rate rises, probably in the period after the general election due in 2013, have already been allocated as part of the government’s policies for reducing the country’s fiscal deficit and finance increasing welfare costs.

To provide the required finance for reconstruction, the government will, initially, issue some JPY11.4 trillion of special bonds, to be subsequently repaid from increased tax revenue. The government intends to pay down the debt in 10 years, utilizing JPY9.2 trillion in additional taxation, imposed from the beginning of the next tax year in April 2012, and some JPY7 trillion from non-tax resources, including further spending cuts and the sale of government assets, such as its shareholding in Japan Tobacco.

It is believed that higher individual income tax rates could be implemented for a period of ten years from January 2013. That rise has been delayed from 2012 so as to recognise concerns that an earlier hike could dampen any nascent economic recovery.

In addition, from April 2012, there would be a three-year corporate surtax, while a tobacco tax rise would start in October next year and last for up to ten years. The package could also include an increase in individual residential tax.

The Finance Minister Jun Azumi has expressed the hope that the budget can obtain parliamentary approval by the end of this month. However, a favourable reaction to tax increases of the opposition parties, whose support will be necessary if the budget is to be approved, is still in considerable doubt.

TAGS: tax | economics | sales tax | fiscal policy | budget | corporation tax | construction | individual income tax | Japan

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