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Japan's ruling coalition is arranging to broaden exemptions in a planned sales tax hike to cushion a blow to the flagging economy - a welcome move for consumers but a setback to fiscal discipline.
Prime Minister Shinzo Abe's ruling Liberal Democratic Party (LDP) and small coalition ally Komeito are in the final stages of a deal to exempt both fresh and processed foods from higher sales tax when it is raised to 10 percent from 8 percent in April 2017.
The exemption would lead to a loss of revenue worth more than 1 trillion yen ($8.19 billion) - about a fifth of tax income brought by the planned tax hike. The government must now scramble for alternative funding sources to cover the revenue hole.
The LDP had initially sought to limit the tax-hike exemption to only fresh foods, but it has caved into Komeito's demand that processed foods be also exempted to support low-income groups.
"They have come close to a deal. I want them to achieve the best results," Abe told reporters on Friday.
The move is widely seen as politically-motivated and marks a victory for Komeito, who wants to appeal to voters hit hard by last year's sales tax rise to 8 percent from 5 percent, ahead of the July upper house election.
Abe also needs to win the July polls to boost his grip on power in both chambers of parliament with the help of Komeito, which has solid vote-drawing power.
"This is Abe's response to Komeito ahead of the upper house polls," said Hidenori Suezawa, analyst at SMBC Nikko Securities.
"If stable funding sources cannot be secured, however, that would be negative for fiscal consolidation."
The government plans to fund the tax-hike exemption by foregoing planned medical care breaks on low-income households worth 400 billion yen. It has not secured other funding sources.
Ideas that have been floated among the government and domestic media include raising cigarette tax, tapping higher-than-expected tax income, foreign exchange reserves and issuing extra bonds to fill the budget gap.
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