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Prime Minister Fumio Kishida during a news conference in October Dec 13, 2022
The government and the ruling parties are frantically hunting for financial resources to cover the planned increase in defense spending, with one proposal being to use the special tax designed to finance reconstruction costs for areas affected by the March 2011 Great East Japan Earthquake.
The special income tax for reconstruction adds a 2.1% levy to individual income tax through 2037, generating about ¥400 billion ($2.9 billion) in revenue for the government each year. The plan is to use a total of ¥200 billion from the tax revenue for defense spending.
Policymakers are also considering extending the 2037 deadline for the tax by another 20 years to make sure there are enough funds.
But critics are already voicing opposition: Why use the reconstruction tax for defense spending?
“This is a tax hike for reconstruction purposes,” said Japanese Communist Party Secretary-General Akira Koike during a news conference Monday. “It’s a complete misappropriation of the tax.”
Prime Minister Fumio Kishida aims to spend a total of ¥43 trillion between fiscal 2023, which begins in April, and fiscal 2027. The government plans to secure funding by cutting other areas of spending and utilizing some surplus money and nontax revenue, but it is expected to fall short by ¥1 trillion from fiscal 2027.
The focus is on how to cover the gap, and the plan under consideration is to:
Increase corporate taxes (bringing in about ¥700 billion to ¥800 billion). Increase the tobacco tax (raising about ¥200 billion). Increase the special income tax for reconstruction (yielding about ¥200 billion).The possibility of funding the construction of Self-Defense Forces facilities using the government’s construction bonds has also been floated, but this would mark a shift from not using those bonds for military purposes.
The financial law stipulates that construction bonds are used to cover the cost of long-lasting roads and bridges that would also benefit future generations. The government has excluded SDF facilities, saying they may be attacked by enemies and would not last long.
In 1966, then-Finance Minister Takeo Fukuda said in parliament that the government would not issue construction bonds for military facilities because they are “like expendables.”
The defense budget for fiscal 2023, the first year of the five-year period in which it will be doubled, will likely increase to ¥6.5 trillion from ¥5.2 trillion for fiscal 2022, Liberal Democratic Party Secretary-General Toshimitsu Motegi said Monday. The government plans to raise it to ¥9 trillion in fiscal 2027.
Complicating matters, the discussions appear to be causing a rift between Kishida and the largest LDP faction, which used to be headed by former Prime Minister Shinzo Abe.
Abe had long argued that government bonds should be used to stimulate the economy, and LDP executives and Cabinet ministers who are opposed to a tax hike — LDP policy chief Koichi Hagiuda, industry minister Yasutoshi Nishimura and economic security minister Sanae Takaichi — are either in the faction or were close to the former prime minister.
Kishida, meanwhile, comes from the Kochikai faction, which has traditionally placed greater importance on fiscal sustainability and wants to avoid issuing government bonds for defense spending.
“Defense capability, which will be drastically strengthened over the next five years, will need to be maintained and strengthened even further. … To do that, it is imperative to secure stable funding sources,” Kishida said during a news conference Saturday.
“We must not rely on government bonds, considering our responsibility toward future generations.”
