Delayed defense tax hikes create ¥300 bil revenue shortfall

Japan is expected to face a revenue shortfall of around 300 billion yen if tax hikes to help fund its plan to nearly double the defense budget to about 2 percent of gross domestic product is postponed by one year from fiscal 2026, a government estimate seen by Kyodo News shows.

The ruling Liberal Democratic Party is considering stipulating that the government begin to gradually raise corporate, income and tobacco taxes from fiscal 2026 in its tax reform plan for the next fiscal year. But the Democratic Party for the People is opposed to such a plan.

The LDP and its junior coalition partner, the Komeito party, need the support of the small opposition party to pass budgets and bills in parliament after the coalition lost its majority in a lower house election in October.

Under the government's goal of doubling Japan's defense budget to 2 percent or more of GDP over the five years through fiscal 2027, it decided to spend 43 trillion yen in defense-related spending during the period.

The government aims to secure a total of over 1 trillion yen by fiscal 2027 from the tax hikes to help fund the planned increase in the defense budget.

According to the estimate, if bills related to the tax increases are passed during an ordinary session of the Diet expected to be convened in January next year, the government will be able to secure 1.7 trillion yen to 1.9 trillion yen by fiscal 2027.

However, if the tax hikes start in fiscal 2027, they are expected to generate only about 800 billion yen that year.

The timing for raising corporate, income, and tobacco taxes has yet to be decided. The government has only said they will come "at an appropriate time in fiscal 2024 or later."