February 16, 2010 / 1:08 AM / 10 years ago

UPDATE 1-Japan's Sengoku open to sales tax debate

(For more stories on the Japanese economy, click [ID:nECONJP])

* Strategy minister joins finmin in testing waters on tax

* Japan in fiscal bind due to large debt burden

By Stanley White

TOKYO, Feb 16 (Reuters) - Japan’s national strategy minister joined the finance minister on Tuesday in paving the way for debate on the politically sensitive sales tax, suggesting the government may consider raising it to pay for welfare spending.

Prime Minister Yukio Hatoyama, who took office in September after a landslide election victory, reiterated on Monday that he wants to keep his pledge to not raise the tax until the next general election for parliament’s lower house, which must be held by late 2013.

Many analysts say the government may have no choice but to raise the consumption tax, now 5 percent, to make up for falling overall tax revenues and a likely rise in spending due to an ageing population and the introduction of allowances for households with children.

“It’s common sense to debate the tax system, including the consumption tax,” National Strategy Minister Yoshito Sengoku told reporters on Tuesday after a cabinet meeting.

Sengoku, responsible for long-term growth and fiscal discipline strategies, echoed comments made by Finance Minister Naoto Kan on Monday and Sunday, when he said the government would start debating tax reform in March. [ID:nTOE60609M]

The new Democratic Party-led government faces a dilemma as it tries to keep Japan’s frail economy afloat without adding to the nation’s public debt, which is already around twice the size of gross domestic product.

The government is unlikely to say it will hike taxes before an upper house election due in mid-2010 for fear of alienating voters, but it still needs to respond to doubts about how it will fund future spending.

The government is expected to fund less than half of its budget for the fiscal year starting on April 1 with tax revenues, which are set to fall behind new debt borrowing for the first time since World War Two.

Rating agency Standard and Poor’s said last month it would cut Japan’s sovereign debt rating unless it produced a credible plan to rein in debt and lift growth in an economy plagued by deflation.

The government has said it will come up with a long-term fiscal plan by June. But analysts doubt it will call for drastic fiscal tightening ahead of the upper house election. (Editing by Michael Watson)

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