The Political Significance of Noda’s Consumption Tax Hike

Laws related to the integrated reform of social security and taxes, centering on the consumption tax hike, were jointly amended by the Democratic Party of Japan, the Liberal Democratic Party, and the New Kōmeitō, and then passed by the House of Representatives on June 26. Prime Minister Noda Yoshihiko’s cabinet submitted them to the Diet in March. Parliamentary deliberations began at the start of June and the three parties agreed to amend the bills on June 15. However, when the lower house vote was called on June 26, 72 members from the DPJ rebelled by either voting against the bills or abstaining. Led by former party president Ozawa Ichirō, 38 members of the lower house and 12 members of the upper house, the House of Councillors, left the DPJ on July 2. Almost all of these individuals formed a new party on July 11: People’s Life First.

A Breakthrough in the Political Deadlock

The central pillar of the bills is the consumption tax hike, increasing the rate from the current 5% to 8% in April 2014 and then to 10% in October 2015. The bills contain revisions to the current social security system, including better pension schemes for part-time workers. The three parties also agreed on the establishment of a Social Security Reform Commission to debate the topic further.

The total government budget for fiscal 2012 comes to over ¥90 trillion. Almost half of this, ¥44 trillion, is financed by deficit-covering government bonds. Japan’s public finances are in a critical state. By raising the consumption tax rate, we can hope for an improvement to this situation.

There are two significant points regarding these bills. The first is that the DPJ implemented an unpopular tax hike. The second is that the government and major opposition parties agreed on basic policy reforms in such areas as the taxation system and social security. For almost the entire period from July 2007 to the present day, no government has secured a majority of seats in the upper house, causing a “divided government” and policy paralysis. The fact that the consumption tax bills passed the Lower House shows that even with a divided government, there is room to break through the deadlock and execute policy.

In what follows, I would like to focus on two issues: why the DPJ government pushed through a tax increase and why the major parties were able to reach agreement. In a separate article, I intend to discuss the division within the DPJ.

The DPJ’s Longstanding Position on the Consumption Tax Hike

The consumption tax issue has actually been under consideration for a long time, and the DPJ has promoted it aggressively in the past. During the 2004 election campaign for the House of Councillors, the party pressed for a 3% consumption tax increase to fund the pension system. In the general election of 2005, the pledge to use a consumption tax hike to finance the pension system was also a part of the DPJ’s platform.

The DPJ’s commitment to raising the consumption tax died out, however, when Ozawa Ichirō became the party leader in April 2006. Ozawa revised the party’s policies, putting together the document “Basic Policies for Government (Policy Magna Carta)” in December of the same year. He believed that raising the consumption tax rate to finance the pension system would be disadvantageous in the 2007 House of Councillors election and had it removed from policy platform. Even after he resigned, in the wake of the political funding scandal in May 2009, the consumption tax increase proposal was not restored; nor was it mentioned in the DPJ’s manifesto for the 2009 general election, which the party won. In fact, the leader of the DPJ at the time, Hatoyama Yukio, asserted that there would be no need to raise taxes for the next four years.

Despite this, matters changed again after Hatoyama resigned and Prime Minister Kan Naoto took office in June 2010. In the House of Councillors election the following month, Kan revealed a plan to increase the consumption tax rate to around 10%. In October he began debate on a combined reform of the social security and tax systems, with an eye to securing adequate government revenue and reforming social security. Then, in June 2011, he put forward the policy proposal to raise the consumption tax rate to 10% by around 2015.

Kan was the minister of finance prior to becoming prime minister. While in this post, he saw the financial crisis intensify in Greece, giving him a renewed sense that Japan must get its fiscal house in order to avoid a similar crisis. As finance minister, he could only propose a consumption tax rate hike to Prime Minister Hatoyama to help resolve the situation. It was only after taking office that Kan found himself in a position to change the government’s direction and set things in motion to have the policy implemented. Hatoyama was no longer in office and Ozawa’s political influence had diminished in the wake of his political funding troubles.

The current prime minister, Noda Yoshihiko, was the finance minister in Kan’s cabinet. He put forward a consumption tax rate increase as one of his policies in the party leadership elections that he won in August 2011. After becoming prime minister in September, Noda set about formulating the bills on an integrated reform of social security and taxes, which his cabinet submitted to the Diet in March 2012.

Uniting to Fight the Osaka Restoration Association?

It is significant that the major political parties managed to reach agreement on this consumption tax issue. And, even more importantly, the decision was reached after the LDP compromised with the DPJ. There are three specific factors we need to consider.

First of all, if the LDP had opposed the bills, the party would have been accused of flip-flopping because its platform for the 2010 upper house election included the pledge to raise the consumption tax to 10%. And in the next general election, the LDP intends to make the same pledge.

The second factor was the LDP’s anticipation that passage of the bills would split the DPJ.

The third factor is undoubtedly related to the rise of Osaka Mayor Hashimoto Tōru and his political organization, the Osaka Restoration Association. Hashimoto has criticized the political world for indecisiveness, and revealed a strong ambition for the ORA to enter politics on the national level under the banner of “Democracy that can make decisions.” Lashing out against the paralysis stemming from Japan’s divided government, Hashimoto argues that disputes between political parties have delayed the implementation of important policies.

The ORA is commanding considerable popularity. In a Mainichi Shimbun poll conducted on June 2 and 3, 41% of respondents in the Kinki region around Osaka stated that they would cast their proportional-representation votes for the ORA in the next general election. Even at the national level, 28% of those surveyed in the poll backed Hashimoto’s group, far more than the 14% for the DPJ and 16% for the LDP.

If the LDP had refused to let the consumption tax bills pass, the public would have been left with the strong impression that Hashimoto’s criticism of political paralysis is on target, thereby boosting his organization. Tanigaki Sadakazu, president of the LDP, has been calling on Noda to dissolve the lower house early. If he had blocked the bills, Noda would have been forced to accede to these wishes. However, even if the LDP had made this maneuver, there was no guarantee that it would have been advantageous to the party. Both Ibuki Bunmei, who was the LDP’s representative in the cross-party talks, and Tanigaki have their constituencies in Kyoto, which is part of the Kinki region where Hashimoto is based. That this line of thinking had occurred to them is beyond doubt.

The reasons outlined above account for why the House of Representatives recently passed the bills containing a consumption tax hike and the reform of social security.