As battles rage in the Diet between the ruling and opposition camps over fiscal 2011 budget-related bills, one dreadful scenario has emerged: The debt-ridden government may run out of funds by around June.

On top of this, various public perks would lapse because they are based on temporary legislation that the ruling bloc is desperately trying to renew.

If the opposition-controlled Upper House vetoes the budget related-bills, the ruling Democratic Party of Japan would not be allowed to issue deficit-covering special Japanese government bonds. Those special bonds would be needed to finance as much as ¥40.7 trillion of the ¥92.4 trillion budget for the fiscal year starting in April.

The government would have to resort to emergency measures such as issuing more treasury bonds and relying on monthly tax revenues if the bills fail. But the fund well would run dry sometime after summer, officials and DPJ lawmakers said.

“The government would be able to (finance the budget) until June, but I’m concerned (about the situation) after that,” DPJ policy chief Koichiro Genba said during a discussion program Sunday on NHK.

“What would happen to the long-term interest rate and stock prices? I’m worried about the market,” he said.

The cash shortage would simply force the government to give up 44 percent of the budget expenses it promised for the fiscal year, possibly including those for pension benefits, public worker salaries, public works projects and various other administrative services.

Also included in the package of budget bills are plans for a newly introduced child allowance, a corporate tax cut and extension of special low tariffs for certain food imports, all slated to start or be extended in April.

The opposition camp has vowed to veto the fiscal 2011 budget and related bills and is demanding that Prime Minister Naoto Kan immediately dissolve the Diet and call a snap election.

Political observers believe the DPJ may offer to replace Kan if this will get the opposition camp to support the bills, or as a last resort tradeoff heed the demand for a Lower House dissolution and election.

If Kan digs in, the ruling and opposition camps will keep playing a game of chicken, with each side waiting for the other to compromise over the budget bills while keeping an eye on how voters lean.

“If ¥40.7 trillion of the ¥93 trillion budget is not secured, it will affect the people’s lives,” said Tomonori Sato, a Finance Ministry official.

The government has no choice but to continue trying to get the opposition camp to back the bills by the end of March, he said.

According to media reports, DPJ Secretary General Katsuya Okada recently gave a copy of former U.S. Treasury Secretary Robert Rubin’s memoir to New Komeito Secretary General Yoshihisa Inoue.

The book touches on the 1995 U.S. government shutdown due to conflict between the Democratic administration of Bill Clinton and the Republicans who controlled Congress at the time.

The U.S. public eventually blamed not the president but Congress for the government shutdown.

Okada apparently was trying to warn New Komeito that voters may have a similar reaction if opposition parties kill the legislation and similarly leave the government paralyzed.

At this point, pressuring the opposition camp to agree to the budget-related bills appears to be the only tactic left for the DPJ.

“It is a basic principle to have the budget clear the Diet within the fiscal year,” Okada stressed.

Outlay deadlines

Among the budget-related bills, the one stipulating new monthly child allowances will directly affect household incomes.

Kan’s administration has been shelling out monthly allowances of ¥13,000 per child — an outlay that doesn’t end until graduation from junior high school.

The DPJ proposed adding ¥7,000 per month to those younger than 3 years old in its new bill for fiscal 2011, but the opposition camp is strongly against this.

Recipients and local governments, which are involved in paying the allowances, will both be impacted if the bill fails.

The current law authorizing the ¥13,000 monthly allowance was passed by the DPJ as temporary legislation valid through fiscal 2010, thus a failure to renew it by April 1 will cut off the ongoing support for children and reinstate payments of ¥10,000 for all kids below age 3 and ¥5,000 for those older than that under a law enacted when the Liberal Democratic Party and New Komeito ran the government before the DPJ swept them from power in 2009.

The LDP-Komeito law pays out until a child finishes elementary school and has a parental income cap that could also be problematic.

Even if the DPJ’s new child allowance bill is passed, the cash may not be there if separate bills fail, including a tax revision that would effectively raise around ¥580 billion by reducing deductions income earners utilize and hike some income taxes.

This is the money that is expected to cover the child allowances.

A failure to pass legislation to cut the corporate tax would also have a profound impact. Small and medium-size firms now have an effective corporate tax rate of 18 percent as part of a temporary cut that the ruling bloc wants to lower further to 15 percent.

But if the related bill fails, the temporary cut would end and a 22 percent levy would be reinstated in April, according to the Finance Ministry.

Another budget-related bill hanging in limbo would ease the Customs Tariff Law, which sets tariffs on all imported products. Because some of the tariffs are based on temporary legislation, a failure to renew the bill by April could see food prices rise.

According to a Finance Ministry estimate, cheese products could rise about ¥10 per 150 grams, while beef could rise by about ¥11 per 100 grams.

However, LDP President Sadakazu Tanigaki hinted at a news conference earlier this month that his party may make an exception and back the tariff legislation because of its impact on the public.

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