Japan may raise sales tax to fund pensions-LDP

TOKYO, Sept 27 (Reuters) Japan may finance its pension scheme through a rise in sales tax, a senior official from the ruling party said on Thursday, calling on the government to stick to its plan to overhaul the tax system as planned.

The government and the ruling bloc had planned to overhaul the nation's tax system in the fiscal year to March 2008, which was expected to pave the way for a sales tax hike from the current 5 percent to finance its bulging social welfare costs.

But analysts worry that the plan may stall as the ruling camp has lost a majority in the upper house after the opposition won an election in July while advocating no tax hike.

''In reality, we cannot pass tax-related bills, even though we can pass budget bills'' with the ruling bloc's firm control of the powerful lower house, Sadakazu Tanigaki, the Liberal Democratic Party's policy chief told Reuters and other media agencies in an interview.

''We should still go ahead with the plan as faithfully as possible.'' Tanigaki has said in the past that Japan will need to raise its 5 percent sales tax to help tame Japan's huge public debt which is estimated at about 150 percent of its gross domestic products -- the highest ratio in the industrialised world.

''We are not going to resort to the sales tax from the beginning, but in the end I think we will conclude that it's best to finance the pension scheme with the sales tax'' he said.

The government plans to boost its share of contributions to the state pension scheme in fiscal 2009/10, which would cost about 2.5 trillion yen (.6 billion) a year.

Many analysts think that the cost -- equivalent to a 1 percentage point hike in the consumption tax -- would be financed through a similar increase in the consumption tax.

On the government's self-imposed goal of balancing the budget excluding debt-related costs by fiscal 2011/12, Tanigaki said the target is in sight.

''It is a matter of course to do the best to meet the goal set by (former Prime Minister Junichiro) Koizumi in view of fiscal management over a period of 10 years,'' he said.

Many economists say the government will need to raise the consumption tax to achieve that target in light of its growing spending on pension and other social security services.

Prime Minister Yasuo Fukuda appointed the former finance minister to the LDP policy post, which was seen by analysts as a sign that the sales tax issue will be at the centre of the new government's policy.

REUTERS MP DS1655