By Tetsushi Kajimoto
TOKYO (Reuters) -Japan has not ruled out raising corporate and household income taxes to fund a planned increase to its defence budget in the next fiscal year, the head of the ruling Liberal Democratic Party's (LDP) tax policy panel said on Monday.
The government is set to boost its military spending in the face of rising China's might and geopolitical uncertainty involving Taiwan and North Korea's missile developments.
With public debt at more than double the size of its economy, Japan has little room left to increase the funding, leaving the country with options such as spending cuts, tax hikes and additional debt issuance.
Given Japan's severe fiscal position, Japan must first calculate how much will be needed for the military outlay, and then look into how it could curb spending in areas with lower priority, said Yoichi Miyazawa, the chairman of the LDP's influential tax commission.
"After making all those efforts, we may finally tap tax revenue" for securing funding sources, Miyazawa said, adding that he did not have any specific items in mind for tax hikes.
"I've heard various rumours about tax items but I haven't made any suggestions ... We must consider from scratch, including raising income and corporate taxes."
Miyazawa ruled out a hike in sales tax - the equivalent of value added tax in other advanced nations - to fund defence spending, saying that tax is aimed at financing social security spending.
Confidence in Japan's fiscal situation accounts for a big factor in determining exchange rates, Miyazawa said, urging Japan to strive to maintain fiscal health to prevent financial failure.
The tax panels from the LDP and its small coalition ally Komeito are kicking off debates on annual tax-code revision, with the focus on realising Prime Minister Fumio Kishida's "new capitalism" programme through R&D related taxation and human capital investment aimed at doubling household assets. Miyazawa also vowed to proceed with debating capital gains tax reform.
Japan's defence ministry has asked for a 3.6% rise in spending to 5.6 trillion yen ($37.67 billion) for the next fiscal year starting in April, as Kishida's government seeks to build up military capacity. That equals about 1% of Japan's gross domestic product of 544 trillion yen.
Kishida's LDP has pledged to double defence spending to 2% of GDP over five years, which would imply raising it by about 5 trillion yen.
($1 = 148.6500 yen)