TOKYO (Reuters) - Japan will consider imposing an environment tax as part of discussions this autumn on an overhaul of the tax system, the government’s top advisory panel said on Tuesday, a move that could prompt opposition from businesses.

Smoke is emitted from a factory area in Kobe, western Japan May 25, 2008. REUTERS/Yuriko Nakao

Prime Minister Yasuo Fukuda, who heads the panel, has put climate change as the centerpiece of his policy in the lead-up to a G8 summit next month, where global warming is high on the agenda.

In a draft of the economic policy outline for 2008, the panel also said the government will “put its utmost efforts” behind spending cuts, although Fukuda’s faltering support rate is making it politically difficult to press on with fiscal reforms.

The annual report by the Council on Economic and Fiscal Policy upheld a five-year plan to cut spending by 11.4-14.3 trillion yen ($105.7-132.6 billion) to achieve a target of balancing the budget, excluding debt issuance and servicing, by fiscal 20011/12.

Fiscal belt-tightening efforts have been prompted by Japan’s mounting public debt. Outstanding public debt is estimated at 778 trillion yen, or roughly 148 percent of gross domestic product by the end of the fiscal year to next March, the worst among major industrial nations.

But pressure on the government from ruling party lawmakers to loosen the spending faucet are increasing as they fear further cuts in public spending would hurt voters’ support.

Government sources have said a “coalition” of lawmakers from the both ruling and opposition parties has been pressing the government to increase spending on social security and education, the areas most likely to catch voters’ attention.

The ruling lawmakers will have opportunities to scrutinize the panel’s draft report at party committees before it is formally approved by the cabinet in late June.

“It is still uncertain whether the government’s belt-tightening efforts will succeed as the very foundation of the Fukuda administration is shaky and a snap election may be down the road,” said Takehiro Sato, a senior economist at Morgan Stanley Japan.

Deteriorating economic conditions are also making it difficult to achieve the budget-balancing target, Sato said.

“As the Japanese economy is barely avoiding a recession, smaller-than-expected tax revenues could undermine the government’s tight budget policy,” he said.

BUSINESSES CAUTIOUS ON ENVIRONMENT TAX

Recent polls show Fukuda’s support rate hovering near 20 percent partly on doubts about his ability to push forward policy with a divided parliament.

The opposition controls parliament’s upper house and has delayed legislation and blocked key appointments, including the government’s first two choices for Bank of Japan governor.

Fukuda hopes for a turnaround by displaying leadership in hammering out steps forward a low carbon world at the Group of Eight leading nations’ summit meeting on July 7-9.

Fukuda announced last week a green policy including a trial system for carbon trade this year and a target to cut its emissions by 60-80 percent by 2050.

Fukuda also proposed raising the proportion of Japan’s energy from “zero emission power” sources such as nuclear, solar, wind and hydro power to more than 50 percent from the current 40 percent, and said an environment tax should be considered as part of overall tax reforms to be debated later this year.

But an environment tax has been controversial as businesses, mainly in the manufacturing sector, worry that such a tax would shackle their activities.

Japan’s biggest business lobby, Keidanren, has expressed opposition to taxing carbon dioxide emissions. A spokesman for the lobby said it may repeat its opposition in its annual requests on the tax system to be submitted to the government later this year.

($1=107.86 Yen)