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How Budget Bills Failure Might Hit Japan's Economy

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TEHRAN, Feb 28 (ICANA) – Japanese Prime Minister Naoto Kan is battling to pass bills needed to implement a $1 trillion budget for the fiscal year from April 1 as opposition parties big and small refuse to cooperate in a divided parliament.
Monday, February 28, 2011 12:34:11 PM
How Budget Bills Failure Might Hit Japan's Economy

Failure to pass budget-related bills would cause a shutdown of some parts of the government as early as in the summer, similar to what happened in the United States in the 1990s, and increase the chance of a downgrade of Japan's debt rating. The ruling bloc can enact the main budget since it controls parliament's lower house, and it would take effect without approval of the opposition-controlled upper house. But to pass bills needed to implement key parts of the budget they must either cobble together a simple majority to gain approval of the upper house or build a two-thirds lower house majority to override the upper chamber. Neither seems likely to happen. Following are some facts by Reuters about budget-related bills and the potential impact on the economy should the bills fail to pass: BUDGET BILLS Budget-related bills on taxes, social welfare and deficit bond issuance must be approved by the opposition-controlled upper chamber. Without these bills, the government cannot secure 44 percent of budget revenues or change the tax code. CORPORATE TAX The government would be unable to lower the effective corporate tax rate by 5 percentage points to 35 percent, which is central to Kan's push to improve competitiveness and create jobs. The Democrats would be unable to expand the corporate tax base by tightening rules on depreciation, which could offset the blow of being able to cut corporate tax. OTHER TAXATION Tax breaks on capital gains from stocks and stock dividends expire at the end of this fiscal year on March 31. The market impact could be significant because the tax rate would double to 20 percent. Tariffs on a sweeping range of imports would rise from April 1. This could have a significant impact on the household sector, because the legislation covers 415 items, including beef and cheese. CHILD CARE SUPPORT The Democrats would be unable to implement their signature policy of paying families with children 20,000 yen ($245) per month for each child younger than 3 and 13,000 yen for those aged 3-15. If the plan is ditched, as the main opposition Liberal Democratic Party demands, payouts would be cut and limited to children up to 12, with income limits for eligibility. Ending the DPJ's child allowance scheme would have limited economic impact given that many parents choose to save the money instead of spending it, economists say. DEBT ISSUANCE If the deficit-bond bill was blocked the government would be unable to secure 41 trillion yen in revenue to fund planned spending of 92.4 trillion yen, leaving it with barely enough money to finance debt-servicing and social security costs. The government could get by until the summer as it can sell up to 20 trillion yen in financing bills to fill the budget gap. If the deficit-bond bill fails to be passed in the current parliament session ending in June the government could eventually shut down. Kan's government is gambling that voter ire at the impasse will be directed at opposition parties for being obstructionist and force them to do a deal. But low support rates for both the ruling Democrats and the main opposition LDP suggest the public is fed up with both sides. MARKET REACTION Economists have said the 2011/12 budget would not help spur economic growth at all, given its lack of focused spending to boost corporate competitiveness. Takahide Kiuchi, chief economist at Nomura Securities, estimates that failure to pass child-care allowance and tax bills could trim GDP growth by 0.15 percentage point in 2011/12, but abolishing corporate tax cuts could deal a blow to the economy in the longer term if it prompts companies to move overseas. Some analysts say political risk would prompt investors to shift to safe assets such as JGBs and to sell Japanese shares. Others say it could trigger a "triple fall" in stocks, bonds and the yen as the prospects for Kan's fiscal reform drive wane.

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