Tax Cuts, Benefits Face Opposition in Japan Ruling Parties; Negative Impact Feared on Nation’s Fiscal Situation

The Yomiuri Shimbun

16:24 JST, October 25, 2023

The government and ruling parties are earnestly debating specific measures related to Prime Minister Fumio Kishida’s intention to return part of recent growth in tax revenues to the public. Efforts are focused on a proposal to reduce income and residential taxes by a fixed amount of ¥40,000 and provide low-income earners with a benefit of about ¥70,000, both on a one-time basis next fiscal year.

However, some in the ruling parties are concerned about the impact of these measures on the fiscal situation and are questioning whether they will sufficiently benefit the economy. The debate within the government and ruling parties may have rough going.

At a plenary session of the House of Representatives on Tuesday, Kishida indicated his intention to return to the public part of recent growth in tax revenues during the past two years of the coronavirus pandemic.

However, even within the ruling Liberal Democratic Party, many people are skeptical that the proposed tax reductions would spur an economic recovery.

At a meeting of the LDP’s Policy Research Council at party headquarters on Tuesday, some participants voiced concern, saying that the tax cuts could accelerate soaring prices.

Income tax cuts would not take effect immediately, it is said, because they require legal revisions. The government expects to implement the tax cuts around the time of next summer’s bonus payments. But Koichi Hagiuda, chairperson of the party’s Policy Research Council, said at the meeting it would take time for the tax cuts to have an impact.

For many years, Japan’s public finances have been covered by issuing government bonds, which are a form of national debt, as expenditures have exceeded tax revenues. Even when tax revenues have been higher than predicted, the amount in excess of expectations has been used mainly to redeem government bonds.

The reality is that the nation’s finances are in a dire situation. As a senior Finance Ministry official put it, “There is essentially no tax revenue that can be returned.”

Tax revenues in fiscal 2022, including corporate tax and consumption tax, reached a record high of ¥71.1 trillion, an increase of ¥10.3 trillion from fiscal 2020. However, tax revenues for fiscal 2023, as of the end of August, totaled only ¥14.2 trillion, down 12.1% from the same period of the previous fiscal year. If tax revenues decrease due to tax cuts, there are fears that government bond issuance will increase, putting further pressure on public finances.

There are numerous opinions within the government and ruling parties over whether the income tax cuts should be implemented, and over their scale and the conditions to be applied.

Hiroshige Seko, secretary general for the LDP in the House of Councillors, said at a press conference on Tuesday that a fixed-amount tax cut would be desirable and suggested that a certain income limit could be placed on the tax cuts.

An economy-related Cabinet minister argued, “We should focus on benefit payments as they are more immediately effective than tax cuts,” predicting contentious debate on the issue.

“I don’t think the proposed tax cuts will be accepted easily within the party. Members opposing the idea will certainly try to rally their forces,” the minister added.