Japan PM says tax hike among options to meet quake costs

TOKYO (Reuters) - Japan has not ruled out any source of funding for reconstruction after the devastating earthquake and tsunami, including a tax increase or dropping a planned corporate tax cut, Prime Minister Naoto Kan said on Tuesday.

The premier is eying spending of 2 trillion to 3 trillion yen (15-23 billion pounds) in the first of several emergency budgets to cope with the damage from the quake, Kyodo news agency reported on Tuesday, although the finance minister said the size of the extra budget has not been decided yet.

Kan's government, still juggling delivering aid to the worst-hit areas with a protracted battle to contain the world's worst nuclear crisis in 25 years, must also decide how to pay for Japan's biggest rebuilding effort since post-World War Two.

An opinion poll published on Sunday showed more than two-thirds of the Japanese public would support an extra tax to fund that effort.

Kan told parliament he was not considering a tax rise at the moment but he signalled that it was among options the government would consider.

"We need to pursue various possibilities," Kan said, when asked about a possible tax increase.

Government officials have also indicated they may scrap a plan to cut the corporate tax rate by 5 percentage points from around 40 percent now as it reviews policy priorities in the wake of the March 11 quake.

"That is among the many options we will consider," Kan said.

Cutting the corporate tax rate, estimated to reduce revenues by some 430 billion yen, has been seen as a step to make Japanese firms more competitive, as well as an important pro-business gesture by the Democratic Party.

Japan's top business lobby this week gave the government the green light to drop the plan.

"I don't mind if the government skips cutting the corporate tax rate," Hiromasa Yonekura, chairman of the Japan Business Federation, told a regular briefing on Monday. "Instead I want the government to move swiftly in its recovery efforts."

The government estimated last week the damage to roads, homes, factories and other infrastructure from the magnitude 9.0 quake and deadly tsunami could top $300 billion (187 billion pounds), making it the world's costliest natural disaster.

Economists polled by Reuters last week forecast the government could end up spending as much as $250 billion in additional emergency budgets, with a first fiscal package seen at around $60 billion.

Japan's parliament on Tuesday passed the regular $1.1 trillion budget for the year from April 1, but it still needs to pass a bill needed to issue bonds to fund some of the spending, both in the regular and extra budgets.

Kan told lawmakers he hoped to submit an emergency budget to parliament in time for debate to kick off next month.

The government has yet to decide on the size of that budget and how it will be financed. Analysts said Tokyo needs to be careful in balancing the immediate needs with longer-term economic and market impact.

"The government may find it more attractive to raise tax to finance rebuilding than borrowing more given dire public finances," said Seiji Adachi, senior economist at Deutsche Securities. "But I think tax hikes would backfire as they put additional burdens on companies and consumers on top of damages brought to their sentiment and activity."

Adachi, who expects the public reconstruction bill to exceed $120 billion, said the preferred option would be a combination of spending cuts and other budget savings and new borrowing covering about half of the total cost.

With public debt already twice the size of Japan's $5 trillion economy -- the highest among industrialised nations -- the government is wary of adding another big chunk to the debt pile. The opposition has called on the government to fund as much of the relief and reconstruction effort as possible by scrapping most of its spending plans, such as increased child support payouts, though economists say some new borrowing appears to be inevitable. ($1 = 81.705 Japanese Yen)

(Additional reporting by Rie Ishiguro, Tetsushi Kajimoto and Kaori Kaneko; Editing by Tomasz Janowski and Chris Gallagher)