By Akihiro Okada

8:00 JST, February 1, 2025

Debates about fiscal policy in major developed countries reflect the politics and public opinion specific to each country.

As the world returns to normal life after the coronavirus crisis, many developed countries are shifting from expansionary fiscal policy to fiscal consolidation.

In contrast, fiscal soundness is not a significant point of contention among political forces in Japan, making it a unique case among major developed countries. Still, there are concerns that if the Japanese government delays fiscal consolidation, the risk of financial markets forcing it to make sudden adjustments in the future will increase.

The government’s budget proposal for fiscal 2025, which it approved last December, focused mainly on the income tax threshold, known as the “¥1.03 million barrier.”

Following the general election in October last year, the Liberal Democratic Party was reduced to the position of running a minority government, and it needs to cooperate with the Democratic Party for the People to pass the budget bill.

The DPFP argued that the ¥1.03 million annual income threshold should be raised to ¥1.78 million because the minimum wage level today is 73% higher than it was in 1995, when the government set the threshold at ¥1.03 million.

However, the Finance Ministry has estimated that raising the threshold that high would decrease tax revenue by an amount ranging from ¥7 trillion to ¥8 trillion, and the question of how to find the necessary resources to make up for that became a problem.

In the end, the government and ruling parties could not overcome the funding problem, and they put together a plan to raise the annual income threshold to ¥1.23 million without the support of the DPFP.

In the debate over tax reform, the DPFP’s catchphrase of “increasing take-home pay” resonated with the public, a significant factor in the party’s success.

However, from a macroeconomic policy perspective, the DPFP’s proposed reduction of income tax burdens is nothing more than a large-scale permanent tax cut.

Japan’s national debt has exceeded ¥1,300 trillion, and its public finances are at the worst level among major developed countries. The fact that the........

© The Japan News