Four Veterans Defy Consumption Tax Cut

The bill for raising consumption tax for foods passed the Lower House and sent to the Upper House with approval of the leading coalition on November 6th. Four lawmakers with the Liberal Democratic Party (LDP) abstained from voting yes in the Plenary Sittings of the Lower House. Their action gave Prime Minister Sanae Takaichi a concern on the future of the bill, because the LDP does not have a majority in the Upper House. 

The bill is to reduce consumption tax rate for foods from 8 percent to 1 percent for two years starting in April 2027. Using the revenue for the rest of 1 percent, the government will establish a benefit to the low-income families. The benefit will be a permanent system from April 2029, when the tax rate will get back to 8 percent. Although Takaichi promised to introduce refundable tax credit with benefits in the campaign for February Lower House election, her policy was diminished to simply a benefit without tax credit.

 

The opposition parties found two insufficiencies in the bill submitted by Takaichi government. One is that it is not clear who can receive the benefit. Through the discussion in the Lower House, the government explained that about 20 million workers with annual income between 1 million yen and 3.5 million yen will receive the benefit. Takaichi changed her mind to expand the recipients to attract opposition parties. “I am considering a wider system” said Takaichi in the Diet discussion. The upper limit of receiving will be higher than 3.5 million yen. But the details of the system have not determined anyway.

 

Another point is that fiscal resource for the tax cut is still unknown. Takaichi has not shown how she will bring 10 trillion yen for the two-year tax cut, only saying “Don’t worry.” It is also unclear how to find the revenue for the benefit beginning in 2029. All the opposition parties voted no to the tax cut bill. While Komeito demands 80 thousand yen of benefit to each citizen instead of consumption tax cut, the Democratic Party for the People has submitted a bill for reduction of income tax and residential tax.

 

A big surprise was some veteran lawmakers in the LDP explicitly showed their frustration with Takaichi’s bill. Former Prime Minister Shigeru Ishiba, former Minister of Economy, Trade and Indusgtry Yuko Obuchi, former Minister on Economic Planning Agency Hajime Funada and Deputy Chairman of LDP Research Commission on the Tax System Yoshihisa Furukawa walked out from the voting in Plenary Sittings on November 6th.

 

“Fiscal resource is not clear. Financial system of the government will be broken. Japanese yen will be depreciated. Interest rate will rise. Price of commodity will jump up,” said Ishiba to the reporters. Obuchi stressed that the consumption tax system was built by predecessors of the LDP who were worried about the future of aged and low-birth society. Obuchi’s father is former Prime Minister Keizo Obuchi, who had been Chief Cabinet Secretary of Noboru Takeshita Cabinet when consumption tax was introduced for the first time with rate of 3 percent in 1989.

 

The opposition of four members may cause trouble in the Upper House. The leading coalition by the LDP and Japan Innovation Party four seats short to a simple majority in the Upper House. Although it needs approval from opposition parties for the bill to pass, all the opposition parties opposed the bill in the Lower House. Takaichi may be forced to make a revision in the bill to receive support from the opposition parties.

 

Moreover, it is possible that some LDP Upper House lawmakers may abstain from the voting as those four lawmakers did. Takaichi worsened the relationship with LDP Upper House members, since she unilaterally replaced Secretary General of Upper House LDP Jun-ichi Ishii in September. Fortune of this populistic agenda of consumption tax cut is still obscure.

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