Takaichi Considers 1 Percent Consumption Tax for Foods in Next Spring

Prime Minister Sanae Takaichi considers introducing new consumption tax rate for foods in April 2027, just before nationwide local elections. Although Takaichi promised 0 percent of consumption tax on foods in the Lower House election in February, it is likely that the rate will be determined at 1 percent, by seven percentage points down from current 8 percent. Takaichi administration is still looking for fiscal resource for the tax cut.

When Takaichi announced her intention to have a snap election of the Lower House in January, some opposition parties embraced consumption tax cut in their campaign platform. Centrist Reform Alliance (CRA) argued that they could permanently eliminate consumption tax for foods. As a competitive policy against CRA, Takaichi’s Liberal Democratic Party, as one of the ruling parties, raised 0 percent of consumption tax for foods limited to two years.

 

After a sweeping victory in the election, Takaichi started discussion for consumption tax cut in National Council on Social Security. Through the discussion there, Takaichi realized that it would take a year for sales registration system to be reformed for 0 percent consumption tax for foods. Instead, the time for introducing 1 percent would be a half year. Takaichi and the LDP leaned on 1-percent option to catch up with the local elections next year.

 

At the time of inflation caused by instability of international order, Takaichi focuses on supporting consumers’ activities to maintain her popularity. Some recent polls show gradual decline in approval rate for her. 1 percent of consumption tax rate for foods may not be the promise she made in the election campaign. Takaichi considers introduction of subsidy with spending for that 1 percent to compensate the broken promise. 1 percent of consumption tax for foods is equivalent with 600 billion yen of subsidy.

 

The government needs to find 5 trillion yen in the national budget, if it eliminates consumption tax rate for foods. Takaichi has been announcing that she would not rely on newly issued governmental bonds to promote her agenda. However, she is forming a supplemental budget to support household and business sectors, which are suffering from inflation brought by blockade of the Strait of Hormuz or depreciation of Japanese yen, by issuing governmental bonds. Large amount of issuance of governmental bonds erodes confidence of national finance.

 

The new tax rate is expected to last two years and Takaichi hopes to establish refundable tax credit for low-income families afterward. But the discussion for refundable tax credit is shrinking into merely a temporary refund, defying tax credit which leads to permanent loss of a certain amount of national revenue. Although Takaichi relies on moderate growth of Japanese economy to implement her economic policy to secure budget for the tax cut, it is unclear whether Japan can maintain its economic stability, given some diplomatic rivalry with some neighbor countries including China.