Cabinet approves outline of two-year consumption tax reduction for food products

Prime Minister Sanae Takaichi’s Cabinet will approve an outline Tuesday of a system to reduce the consumption tax on food products from 8% to 1% for a two-year period beginning next April.

The plan, which calls for making up lost revenue from the tax cut through a review in government spending and revenue and not relying on deficit bonds, forms the basis of related bills expected to be submitted to the autumn session of parliament.

The consumption tax is to be reduced from 8% to 1% for two years beginning next April. After that, from April 2029, the government aims to introduce new benefits for low and middle-income households.

The Takaichi administration has made lowering the tax a key goal, with her Liberal Democratic Party including it as a campaign promise in the February Lower House election. But the specific details remain vague on how the government intends to cover what is expected to be an annual ¥5 trillion ($32.3 billion) revenue loss due to the measure.

The prime minister has said she’ll return the tax rate to 8% in 2029 when the new benefits go into effect despite concerns about whether the economic situation and public opinion then would make it difficult to do so.

Getting the related tax cut legislation through both chambers of parliament this autumn is expected to be extremely difficult, however.

While the LDP and its Japan Innovation Party (JIP) ruling coalition partner control the Lower House — the LDP alone has a two-thirds majority there — they are four seats shy of a majority in the Upper House.

The autumn session is likely to start in the first half of October, and the government needs to get the related bills passed before the end of the year.

Opposition parties, which control the Upper House, are against the measure. They are expected to engage in fierce debate with the Takaichi administration.

Many in the LDP have also expressed concern about what it means at the local government level, where revenue from the consumption tax helps fund a variety of social welfare programs.

“Debate in parliament will be quite intense. So we’re asking the government to prepare a related bill for the tax cuts and respond in a way that can withstand the debate,” said Itsunori Onodera, chairman of the LDP Research Commission on the Tax System, on Monday.

However, due to opposition party control of the upper chamber of parliament, a rejection there could lead Takaichi to invoke Article 59 of the Constitution, a potentially risky move for the prime minister that could make it more difficult for her to get the opposition on board with other bills the government wants to pass.

Article 59 states that a bill rejected by the Upper House, or deemed rejected because it was not voted upon within 60 days after the chamber receives it from the Lower House, can go back to the more powerful lower chamber, where a two-thirds majority will pass it into law.