Hosokawa backs down on tax cut

TOKYO - The Japanese Prime Minister, Morihiro Hosokawa, was yesterday forced into the humiliating position of apologising for announcing an economic stimulus package on Thursday - because he did not consult his coalition allies beforehand, writes Terry McCarthy.

Plans to inject more than pounds 80bn to help the Japanese economy out of its recession have therefore been put on hold until a compromise can be worked out with the Socialist Party over the difficult issue of tax reform.

A contrite Mr Hosokawa, who was taken by surprise at the virulent reaction to his plans to cut income tax this year and raise sales tax to compensate in three years' time, yesterday apologised to his cabinet for failing to ensure 'sufficient contact among the government and ruling coalition parties'.

Aides to the Prime Minister said they hoped an agreement would be reached by Monday.

But the really guilty party, the Ministry of Finance, emerged unscathed, as Mr Hosokawa had to endure a political batterring from all sides. No one was against cutting income tax - under the Prime Minister's plan it would be reduced by pounds 35bn, back-dated to the beginning of this calendar year.

But it was the fiscally conservative Ministry of Finance that had demanded a compensatory hike in the sales tax so that the overall effect of the tax measures would mean no loss of revenue.

The Socialist Party, which poses as the champions of the under-privileged, immediately saw red at the proposal to raise the cost of goods in the shops, and threatened to pull out of the seven-party coalition government.

Many private economists say that the Japanese government's coffers are sufficiently well maintained for it not to need to increase the sales tax, particularly if the stimulus package causes the economy to begin growing again, which would automatically lead to higher tax revenues overall.