Takaichi’s Consumption Tax Cut Faces Opposition in LDP

Immediately after she announced her plan to reduce consumption tax rate for foods from 8 percent to 1, Prime Minister Sanae Takaichi faced strong dispute of lawmakers in the Liberal Democratic Party. The criticisms targeted lack of perspective for fiscal resource of the tax cut and difficulty of resumption of current tax rate two years later. It is possible that the frustration with Takaichi’s unilateral handlings of policies will erode her political basis in the ruling party. 

Consumption tax cut was firstly advocated by opposition parties as the policy for the Lower House election in February, which was abruptly decided by Takaichi. To compete with rival parties, Takaichi suddenly included the consumption tax cut for foods in LDP’s campaign platform. Having achieved victory in the election, Takaichi launched a multi-partisan council to discuss the tax cut. Although the council could not reach a consensus, Takaichi decided on July 30th to introduce the tax cut in April 2027.

 

The first step to implement the policy was to get approval from the LDP. However, a number of LDP lawmakers opposed Takaichi’s idea in a meeting of tax system commission on July 31st. The greatest point was ambiguity of fiscal resource for the tax cut. Takaichi explained that reform of fiscal spendings can produce enough resource for consumption tax cut.

 

But ambiguity on fiscal resource caused steep hike of long-term interest rate, because the market predicted further issuance of governmental bonds to compensate consumption tax cut. Consumption tax is mainly spent for social security. Reduction of consumption tax may bring deterioration of social security service, causing distrust of voters on LDP’s handling of policies. “Finding fiscal resource must have been a part of our campaign platform,” told former Minister of Defense, Tomomi Inada, after LDP meeting on tax system.

 

Some LDP lawmakers advocate cash handout for low-income families rather than reducing consumption tax rate for foods. That is the same argument that opposition parties made in the multi-partisan council, which Taiachi had dismissed. One reason for cash handout is difficulty of Takaichi’s plan that promises returning the tax rate from 1 percent to 8 two years after the introduction.

 

Takaichi decided consumption tax cut without consensus of the LDP. Protesting Takaichi’s arbitral decision making, former minister of Economy, Trade and Industry, Yuko Obuchi, stepped down as a core member of LDP tax system commission. It has been usual that discussion for reform of tax system was made in the LDP before the prime minister would decide it. Takaichi’s discretionary decision generated political frustration in the LDP.

 

Inada and Obuchi can be seen as a political rival of Takaichi as female leaders. Former Minister for Foreign Affairs, Taro Kono who was a contender of Takaichi in LDP presidential election last fall, is also one of the protesters against consumption tax cut. Approval or opposition on consumption tax cut may develop as a major struggle for leaders’ race in the ruling party.

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