Get it right, that is. Yesterday (March 27), Prime Minister Fukuda held a press conference that upped the ante on his earlier statement, with a more specific proposal on the gasoline taxes and the road construction budget and calling on the opposition to join the LDP and New Kōmeitō in joint consultations. The Sankei has posted the full text of the briefing here and here. The hardcopy Yomiuri has a convenient outline of the latest proposal, which I will once again translate, appropriately edited, for your convenience:
1. Enactment of the FY2008 revenue bills during this fiscal year (FY2007).
2. Thoroughgoing elimination of waste from expenditures related to the Road Development and Maintenance Budget.
3. Abolish the road-specific funds system on the occasion of this calendar year’s fundamental amendment of the tax system and turn the revenue over to general-purpose funds beginning in FY2009.
4. The tax rates including the temporary surcharge shall be examined, taking into consideration such matters as the international undertaking on global environmental issues and the need to develop and maintain local roads.
5. A Mid-term Road Development and Maintenance Plan shall be newly formulated for a five-year term (i.e. shortened from the current ten year plan currently being proposed by the Fukuda administration and the ruling coalition).
6. The new development and maintenance plan shall also be reflected in the implementation of the FY2008 budget. With regard to the use of the FY2008 funds, the Fukuda administration will be open to consultations if there is a realistic proposal from the DPJ.
7. Establish a consultation group between the ruling and opposition parties and consult and decide the principles for the use of the gasoline tax revenue as general-purpose funds, the Road Development and Maintenance Plan, and other matters.
On a related matter, this Yomiuri reports says that government sources have indicated that any extra taxes collected as the result of the temporary elimination of time-limited tax benefits on April 1 will be refunded. As I indicated before in my mock coalition announcement, this does not require any additional legislation, but the Yomiuri leak is an indication that the government is preparing for a supermajority override. The report says that this will be part of a Prime Minister’ s announcement on the overall issue at the end of this fiscal year, meaning presumably March 31, i.e. next Monday.
So now what? To answer that question, we must first take a look at the broader political picture.
The major political setbacks to the Fukuda administration have been the following:
1) The revelation that it could not keep the Upper House election campaign promise (made by Prime Minister Abe to be sure) to identify all the holders of the 50 million misplaced public pension accounts.
2) Its failure to come to terms with the type-C hepatitis patients who contracted the disease from blood transfusions and fibrin sealants.
3) The JMSDF Aegis destroyer Atago’s collision with a fishing vessel and the government’s faulty response.
Yet it is instructive that Yōichi Masuzoe, the outspoken Health, Welfare and Labor Minister on the watch for both 1) and 2), enjoys by far the highest approval rate (beating out even the highly popular “No one/no answer” by a healthy margin), and that Defense Minister Shigeru Ishiba, the defense otaku on the watch for 3), comes next, though he did lose a lot of goodwill as the result of the accident and its aftermath. What these two men have in common is the appearance of a sincere desire to get things done in the public interest and the ability to project it to the general public. They have a touch of that inimitable political skill that Junichirō Koizumi had in droves. In contrast, Mr. Fukuda has appeared indecisive and ineffectual, and his political style, once seen as soothing and reassuring, does nothing to dispel that impression.
However, Mr. Fukuda, or perhaps more appropriately the ruling coalition, has been saved by what appears to be a creeping public disillusionment with the DPJ’s highly and visibly politicized approach to policy issues. This had become evident with the continuing standoff over the appointment of a BOJ Governor*. The Fukuda administration may be falling in the public polls, but support for the LDP seems to have stabilized; the DPJ, if anything, is doing worse than the LDP. On this note, it is now time to go back and address the subject of Mr. Fukuda’s announcement.
Public opinion polls show that two-thirds of the Japanese voters consistently want the surcharge to be dropped, yet the DPJ has not been able to capitalize on it politically. A similar majority of voters wants the two sides to come to an accommodation, and is clearly not buying the DPJ’s hard-line approach. Mr. Fukuda has finally come out with a substantive proposal that promises to take some money away from the road tribe (though the ultimate outcome will not be clear until we see a new road plan and the actual allocation of the funds). There appears to be substantial internal opposition from the road tribe, but this will only serve to enhance his reputation, provided he can actually deliver credible reform. In any case, he has acted, and given the impression of acting decisively. This is definitely a plus for Mr. Fukuda.
So what will the future bring? First of all, I do not believe that April will be the kindest month for the DPJ. The public support for a compromise on the surcharge and the road construction earmark as well as the DPJ’s own languishing support numbers show that its shifting explanations for its stand (now claiming that dropping the surcharge is an antirecessionary measure, a plausible explanation for a temporary, say, one-year lapse) is taking its toll and deepening the impression that the DPJ is playing politics. Whatever confusion arises, which I expect to be relatively minor and therefore easily weathered, is likely to be attributed more to the DPJ than the ruling coalition. Yet the DPJ is locked into an absolute opposition to the surcharge and the road construction earmark, making it difficult to take credit for any concessions that the Fukuda administration has made or will make, or to even participate in any consultations or negotiations. The time has come to settle accounts, yet the DPJ will refuse to lay down its cards. I think that this will reflect negatively, if anything (I think that the DPJ is down, or nearly so, to its core support), on its poll figures.
The next point of tension will come in autumn, when the time comes to work on tax reform, including the gasoline tax surcharge. Prime Minister Fukuda in his announcement explicitly linked the gasoline tax rate to broader issues like global warming and difficult government finances, as well as the continued need to finance road construction and maintenance. He also raised many uses for the gasoline tax revenue in the context of abolishing the earmark. All this appears to indicate that Mr. Fukuda’s default position is to maintain the surcharge.
It is my belief that the DPJ will be unable to engage in a dialogue at that point. Once the gasoline taxes are disconnected from the road budget and the multiyear development and maintenance plan, there is no way to determine an appropriate gasoline tax rate outside of the context of the overall tax profile. But the DPJ claims that all its campaign and post-campaign promises from funding a basic public pension system solely with government revenues to dropping local government co-payments for national road construction works can be funded without raising taxes while improving the public debt position. There is no way that this position can be incorporated into a meaningful dialogue with the ruling coalition. Thus, I believe that the DPJ will stay out of the tent and hope that the Fukuda administration’s default position on the surcharge plus an early (FY2010, or even 2009?) consumption tax hike to fund the pension system will discredit the ruling coalition in the eyes of the public.
Which way will the public turn? It’s hard to guess because I believe that much will depend on how forthrightly and forcefully the Fukuda administration is able to push its case. The polls say that the majority of the voters want the surcharge to end, yet it was never an issue during the last ten years of its existence at current levels. In other words, it is an issue that only presents itself as the surcharge is set to expire, but it is being exacerbated because of the waste and corruption surrounding the expenditures. On the larger issue of the consumption tax rate, the public in the past has shown itself to be more or less reconciled to an eventual hike to narrow public financing gaps, but the distrust in government has forced the ruling coalition to take the issue off the table for the last couple of years.
So there’s a credibility issue that the Fukuda administration must address in its battle against vested interests, which in turn will be played out against the background of opinion polls, media voices, and the Greek chorus of the DPJ. But if push comes to shove with the road tribe in his attempt to carve out a significant chunk of that road money for the general budget, will he be willing to do what Mr. Koizumi did, and threaten to kick dissenters out, to call a snap election if necessary? The DPJ is sitting in the opposite corner on this one, crying for more, instead of less as in the case of Mr. Koizumi’s Post Office privatization, but the internal dynamics are the same. It is not in the nature of Mr. Fukuda to seek that kind of confrontation, but he will have no choice but to wield the Prime Minister’s nuclear option if he becomes trapped in the middle ground between vested interests and the opposition without the votes to force a supermajority override around this time, in 2009 March.
* The DPJ appears to have learned its lesson on this one and quietly allowed Satoshi Tani to be reappointed as Governor of the National Personnel Agency. The DPJ had opposed his initial appointment in 2004.
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