Key Campaign Pledges Carry Issue of Fiscal Resources; Concerns Rise over Handout, Tax Cut Funding Sources

By Kota Iga and Arata Hara / Yomiuri Shimbun Staff Writers

1:00 JST, July 13, 2025

For the House of Councillors election to be held on July 20, parties have put forward key campaign promises such as consumption tax rate cuts, cash handouts and reductions in social insurance premiums.

They are touting the effectiveness of these measures as ways to combat high prices and revitalize the nation’s economy. However, there are many issues to be addressed, such as securing the necessary funding and processes to implement such measures, but the debate has not yet deepened.

Difficult to cover shortfalls

“Prices are rising, and smiles are disappearing from the dinner table. To restore them, we will temporarily abolish food items’ consumption tax. We will implement responsible tax cuts,” Constitutional Democratic Party of Japan leader Yoshihiko Noda said during a campaign speech in front of JR Gifu Station on Friday.

Lowering the consumption tax rate on food items to zero would result in a ¥5 trillion shortfall in tax revenue over one year, while lowering the consumption tax rate to 5% on all items would result in a ¥15 trillion shortfall. Abolishing the consumption tax entirely would result in a ¥30 trillion shortfall.

The CDPJ has showed its policy to use surplus from national reserves funds and the Foreign Exchange Fund Special Account to cover the ¥5 trillion shortfall, and made this clear in its campaign pledge. But the Liberal Democratic Party has expressed skepticism over the idea, with LDP Election Strategy Committee Chairperson Seiji Kihara saying, “There are funds in the reserves that cannot be tapped, such as those designated for decarbonization initiatives and the semiconductor field.”

Part of the funds for the foreign exchange special account have already been allocated for the enhancement of defensive strength. A senior Finance Ministry official emphasized, “If the special account is used as if it were a magic wand, we would be unable to manage when actual foreign exchange intervention is needed.”

Outperformed tax revenue

“We won’t make empty promises as a makeshift,” Prime Minister Shigeru Ishiba, who is also the LDP president, criticized pledges of consumption tax cuts during a campaign speech in Sendai on Friday. Even a pledge by the LDP and its junior coalition partner Komeito to provide ¥20,000 to most adults and ¥40,000 per child or per adult in households exempt from resident tax, in cash payments, would need more than ¥3 trillion. But fiscal resources for such a measure remain unclear.

The LDP explains it does not seek issuance of deficit-covering bonds for the cash provision, and it will instead use the outperformed portion of the fiscal 2025 tax revenue. However, tax revenue is subject to economic conditions and therefore volatile. Moreover, half of the retained earnings after the fiscal year budget are closed, including outperformed tax revenue, and are required by law to be allocated for debt repayment. In fiscal 2024, the other half of the ¥2.2 trillion retained earnings were allocated to defense spending. In reality, there is little leeway to allocate funds for other purposes.

The Democratic Party for the People and Reiwa Shinsengumi accept the idea of issuing deficit-covering bonds. But with long-term interest rates continuing to rise, interest payments on government bonds are expected to swell further, leaving a heavy burden on future generations.

Burden on local governments

Both tax cuts and cash provisions face challenges in terms of institutional design. The CDPJ is proposing a consumption tax cut starting in April next year, but in addition to the need to revise tax-related laws in the Diet, Ishiba said it will take “one year” to make necessary modifications including changes to cash register systems used in stores and other outlets.

Meanwhile, the government and ruling parties aim to get a supplementary budget approved to fund the handouts at the extraordinary session of the Diet in the autumn, with plans to begin disbursement by the end of the year by utilizing banking or postal saving accounts linked to personal identification My Numbers to receive public funds. However, as of the end of May, only 65% of individuals had registered for public funds receipt accounts.

Every time the central government implements a cash provision program, such as the ¥100,000 handout to all citizens in 2020, local governments tasked to carry out the actual provision have faced a significant administrative burden. This time as well, concerns have emerged among local governments. “The workload will not decrease, but rather will only increase,” Chiba Gov. Toshihito Kumagai said.