Japan PM Kishida to raise taxes in stages to boost defence

TOKYO - Japanese Prime Minister Fumio Kishida said on Thursday that his government would not hike taxes for the next fiscal year but would raise them in stages towards fiscal 2027 to secure funding to boost the defence budget.

As Japan prepares next year’s budget, Mr Kishida has already announced plans

to lift defence spending to an amount equivalent to 2 per cent of gross domestic product within five years,

from 1 per cent now.

That would take Japan’s annual defence budget to more than 11 trillion yen (S$109 billion) from the current 5.4 trillion yen, giving the country the world’s third largest military budget after the United States and China at their current levels.

“We won’t increase burdens on people next fiscal year,” Mr Kishida told a meeting between officials from the government and ruling coalition. “We will consider implementing (tax hikes) in several stages over multiple years towards fiscal 2027.”

The boost in defence spending stems from an increasingly assertive China and unpredictable North Korea, in addition to the Ukraine crisis and the tension in the Taiwan Strait.

It is, however, unclear how many unpopular tax hikes would be needed and how much more debt needs be issued, and more fundamentally whether Japan could secure sustainable funding sources over time.

Mr Kishida on Thursday made no mention of fresh debt issuance to finance the increase in the defence budget.

To maintain defence capabilities, Mr Kishida said the government needs to secure additional funding sources of around 4 trillion yen beyond fiscal 2027, three quarters of which will be secured by spending cuts, tapping budget reserves and non-tax revenue.

The rest will be paid by tax hikes, Mr Kishida said. Given the severe economic environment surrounding households, the government will not adopt measures that would increase individual income tax burdens, he added.

Some media opinion polls showed the public was divided over the defence spending plan as many people want the government to prioritise support for them to cope with surging costs of living.

Boosting military spending could further strain Japan’s public debt, which is already more than twice the size of its economy, the biggest multiple in the industrialised world.

Mr Kishida ordered the government on Monday

to earmark around 43 trillion yen

for the upcoming five-year mid-term defence build-up plan, compared with the current five-year plan worth 27.5 trillion yen.

He stressed the need for spending reform first, tapping the special account budget and unspent coronavirus funds, and then selling national assets.

The government and ruling coalition will decide on concrete measures by the year-end.

Mr Kishida urged the ruling coalition tax panel to consider what specific taxes will be targeted and how to implement tax hikes. REUTERS