Q+A-Japan's politically touchy debate on sales tax hike

Sun Jul 4, 2010 12:51am EDT

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By Yoko Nishikawa

TOKYO, July 4 (Reuters) - Japanese Prime Minister Naoto Kan, who has made fiscal reform central to an election campaign for a July 11 poll, wants to debate a future rise in the politically touchy consumption tax to curb the nation's soaring public debt. [ID:nTOE66200S]

Kan's call last month to discuss possibly doubling the 5 percent sales tax was a major shift from his Democratic Party's stance under his predecessor, Yukio Hatoyama, who had vowed not to raise the tax for four years after taking power in 2009.

Floating the idea is politically risky ahead of the election but Kan is betting that he can convince voters to tolerate a tax hike, given growing worries about mushrooming debt and rising social welfare costs.

Here are some questions and answers on Japan's consumption tax, which is one of the lowest among major economies. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

Graphic on Japan's fiscal woes: r.reuters.com/sez92m

Graphic on Japan voter support: r.reuters.com/myv63g

More stories on Japan economy, click [ID:nECONJP] ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

WHY DID THE NEW PM BRING UP THE ISSUE NOW?

Kan's willingness to broach the sensitive topic reflects the seriousness of Japan's bulging public debt and the challenge of funding welfare and pension costs for a rapidly ageing society.

Japan's outstanding public debt is near 200 percent of GDP, the highest among advanced economies, keeping bond investors and voters wary as the government tries to balance the need for stimulating the economy with a need for fiscal prudence.

"Debating the sales tax has long been seen as a political taboo. But for the Japanese people and for us politicians to achieve a strong economy and strong fiscal condition, we dared to mention this," Kan told a news conference in mid-June, where he stunned listeners by citing a possible rise to 10 percent.

Economists have long said a hike is inevitable to help restore Japan's tattered finances and fund growing pension, medical and social welfare costs for a greying society.

The government could raise some 2.5 trillion yen ($) annually by raising the tax by 1 percentage point. That compares to an expected tax revenue of 37.4 trillion this fiscal year, including 9.6 trillion from the sales tax.

HOW LIKELY IS THE CONSUMPTION TAX HIKE AND WHEN?

Kan, Japan's fifth premier in three years, has said it would take at least two to three years to implement a sales tax hike, adding that the government would start a full-fledged debate on the tax after the upper house election. [ID:nTOE65K03X]

Kan, a former grassroots activist who is trying to capitalise on his common-man image, wants to consider lowering tax rates for daily necessities such as food as well as tax credits for people with low incomes if the sales tax is raised.

Kan has called for a multiparty debate on the politically sensitive issue and said the government should first seek a mandate in a general election, which must be held by late 2013, to implement any sales tax hike.

But other parties are either refusing or saying they would participate only on certain conditions. Some in Kan's own party and a tiny coalition partner are also against the tax hike.

Opposition parties have criticised Kan for flipflopping on the contentious topic and for lacking his own ideas after he brought up the notion of doubling the sales tax by using an opposition proposal, which he called "one major reference point."

The main opposition Liberal Democratic Party, which is calling for a sales tax rise to 10 percent in its election platform, is criticising Kan for using its calculation without saying how the Democrats would mesh a hike with their previous promises on spending programmes such as child allowances.

Kan's Democratic Party plans to map out its proposals for tax reform, including the size of a sales tax hike, by the end of the fiscal year to March 2011.

HOW DID IT PLAY OUT IN THE PAST?

Japan last raised the tax, to 5 percent from 3 percent, in 1997, a move that was followed by a big election defeat for the then ruling party as voters blamed the higher consumption tax for derailing a nascent economic recovery.

But people may now be more willing to tolerate a rise because of worries about creaky pension and health care systems and the spectre of a Greek debt tragedy.

A poll by the Yomiuri newspaper in late June showed that 64 percent of voters thought a sales tax hike was necessary for fixing state finances and maintaining the nation's social welfare system, against 33 percent who did not. But other polls have shown voters were still divided over the need for such a rise.

Kan's gamble may be less risky than precedent suggests. Still, voter support for his government, which had jumped right after he replaced Hatoyama, has fallen as the premier's call to debate a future sales tax hike put off some voters.

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