Japan's Prime Minister Fumio Kishida (second left) walks past a Japan Ground Self-Defense Force (JGSDF) Type 19 155 mm wheeled self-propelled howitzer (back left) and a Type 12 surface-to-ship missile (back right) as he inspects equipment during a review at JGSDF Camp Asaka in Tokyo on Nov 27, 2021. (KIYOSHI OTA / POOL / AFP)
TOKYO — A tax panel of Japan's ruling Liberal Democratic Party on Thursday agreed to raise the country's corporate, income and tobacco taxes to pay for a doubling of the defense budget over the next five years as it confronts rising regional tensions.
The tax plan, following through on Prime Minister Fumio Kishida's commitment to raise taxes to lift defense spending to 2 percent of gross domestic product, had become bogged down in wrangling among lawmakers who objected to near-term tax increases that could hurt Japan's fragile economy.
The tax plan had become bogged down in wrangling among lawmakers who objected to near-term tax increases that could hurt Japan's fragile economy
The delays highlighted challenges for Kishida as his popularity dwindles and he juggles conflicting priorities, which pit restoring Japan's tattered public finances against addressing geopolitical risks.
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Japan is struggling to secure funding sources for planned defense spending of 43 trillion yen ($315 billion) over the next five years, which could further complicate its aim of balancing the budget – excluding new bond sales and debt servicing – by fiscal year 2025.
The government also recently floated issuing construction bonds to develop Self-Defence Forces facilities, Kyodo news reported, which would ease the need for tax hikes but mark an unprecedented use of infrastructure-related debt for military purposes.
The tax plan will be written into an annual tax-code revision for the next fiscal year from April, with the aim of gaining formal government approval on Friday, Yoichi Miyazawa, chief of the ruling party's tax panel, told reporters after the meeting.
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"Participants agreed to leave the defence tax plan entirely to me," Miyazawa said.
The tax hikes will kick in "at an appropriate time" in fiscal year 2024 or thereafter, he added.
Among the three taxes targeted for increases, the special income tax was originally intended to help rebuild areas hit by the 2011 earthquake and tsunami in northeast Japan, which was unrelated to military spending.
The corporate tax hikes would consist of surtax of 4 to 4.5 percent, with exemptions for small firms with annual income of up to 24 million yen, Miyazawa said.
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Some LDP lawmakers had objected, however, that raising corporate taxes could undermine the push for wage increases that the government considers necessary for sustained growth and inflation.
Kishida has resisted calls from within his own party to issue additional bonds to fund defense spending, however, and the proposed use of construction bonds for military facilities would be unprecedented. Such bonds are intended to fund infrastructure to benefit future generations.
Under the defense build-up plan, Kishida told Miyazawa to come up with a tax hike plan that would secure about 1 trillion yen annually from the fiscal year ending in March 2028. The premier intends to forgo tax hikes in the coming fiscal year but consider raising taxes in stages from fiscal year 2024.