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Japan's Government, Opposition Agree Tax Deal

by Mary Swire,, Hong Kong

19 June 2012

Japanese Prime Minister Yoshihiko Noda has been successful in reaching a deal with opposition parties, and, in particular, the Liberal Democratic Party (LDP), on his plan for future hikes to the country’s consumption tax rates.

Under the government’s plan, consumption tax will increase from its present rate of 5% to 8% in April 2014, and rise again to 10% in October 2015. After full implementation, the government has estimated that the tax increases would provide additional revenue of some JPY13.5 trillion (USD171.5bn) per year, or 2.8% of Japan's gross domestic product (GDP).

Noda sees the consumption tax increases as vital in going some way to proving Japan’s seriousness in bringing its finances under control, achieving the promised targets of halving its fiscal deficit over the period from 2010 to 2015, and then beginning to reduce its public debt, currently way over twice its GDP (although almost half of that is provided from internal sources).

However, Noda’s plan appeared to run aground due to opposition within his own party, the ruling Democratic Party of Japan (DPJ). Several long DPJ meetings have been held, without any resolution or compromise by those that are implacably opposed to the bill because of the present fragile state of Japan’s economy and the probable electoral unpopularity of the proposal.

That led Noda, in an effort to save his consumption tax plan and, effectively, his government, to try the only real option left to him - some kind of deal with the LDP. The LDP has previously remained resolutely hostile to the tax proposals, not because it was opposed to the tax hikes, but because the tax hikes were explicitly excluded from the DPJ’s 2009 election manifesto by which it came to power, and, therefore, general elections should be held immediately so as to legitimize the government’s plan.

It was therefore surprising when, first of all, the LDP agreed to tax talks with Noda following a ministerial reshuffle, and then when it was announced that the June 15 deadline of reaching an agreement (to allow the tax bill to be approved before the end of this parliamentary session) had been respected.

In fact, the LDP has agreed to support legislation imposing the future consumption tax increases, but has also extracted a commitment that the DPJ will drop some of their other long-standing commitments for social security and welfare reforms, including the guaranteed minimum pension and health insurance reforms, which did form part of its 2009 election manifesto.

The DPJ would, effectively, take those reforms out of its current programme, by agreeing to create a forum on social welfare and pension issues, formed of representatives from all the political parties.

However, while the support of the opposition parties should ensure the success of Noda’s tax hikes in both lower and upper houses of parliament, many of the DPJ’s leaders and their supporters are against the plan and could vote against the increases, which, if allowed to happen, could split the DPJ and weaken Noda’s future party support as Prime Minister.

TAGS: tax | economics | sales tax | fiscal policy | budget | social security | Japan

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