As the Cabinet Office has announced it will be extremely hard to achieve the key government goal of a positive primary budget balance by fiscal 2020, fiscal policy handling is bound to be difficult, most likely centering on whether and how much to cut back on budget expenditures, including social security spending.
Government discussions started Thursday with the aim of crafting a fiscal reconstruction programme this summer as scheduled.
While Prime Minister Shinzo Abe has committed to achieving his administration's fiscal reconstruction target by fiscal 2020, estimates released on Thursday by the Cabinet Office showed that the fulfillment of the primary budget balance goal, as things stand, will be a nearly impossible task.
To accomplish the primary balance goal - bringing about a balance between policy expenditures of the central and local governments, not including debt servicing costs, and those governments' revenues, without relying on fresh bond issues - there are only two options: slashing budget spending or raising tax revenues.
Tax increases on top of the rise of the consumption tax rate to 10 per cent scheduled for April 2017 are hardly possible, according to government officials.
The focal point in the discussions in the run-up to the envisaged fiscal reconstruction programme will be how to cut back on the size of budget expenditures, they said.
¥9.4 tril. short
At a meeting on Thursday afternoon of his major advisory body, the Council on Economic and Fiscal Policy (CEFP), Abe said, "The goal of materializing sound government finances by fiscal 2020 should be maintained."
He added that he would call on Cabinet members concerned to "push ahead with studies [for completing the planned fiscal reconstruction programme by the coming summer] by clarifying major points of contention, with [the council's] private-sector members playing a central role."
Abe's remarks appeared to be aimed at keeping the markets from getting the perception that the government is not eager to pursue the fiscal reconstruction goal of rebuilding debt-ridden state finances - a perception that would undermine international trust in Japan.
The goal of course means achieving a primary budget surplus in the central and local government budgets combined. The aim is to put an end to the current deeply indebted finances to make it possible to fund policy measures without depending on new bond issues.
According to projections by the Cabinet Office, however, primary budget balance figures for fiscal 2020 will log a deficit, even under an optimistic scenario in which Japan's economic growth rates are maintained at 2 per cent or more in real terms per year, while the consumption tax hike to 10 per cent from April 2017 goes ahead as planned.
Under this favourable scenario, the primary budget balance would still fall ¥9.4 trillion short of a surplus, the Cabinet Office said. The ratio of the primary budget deficit to gross national product would be 1.6 per cent, according to the announcement.
In the CEFP meeting on Thursday, four members from the private sector, including Prof. Motoshige Ito of the University of Tokyo, proposed that the ratio of primary budget deficits to the gross national product, which is expected to stand at 3.3 per cent in fiscal 2015, be reduced by 0.5 percentage point annually on average, starting from fiscal 2016.
Compatibility with growth
The proposal does not refer to any specific steps to trim budgetary appropriations. But it is believed that the proposal presumes cuts in social security expenditures, such as medical services and nursing care, that have been grown by about ¥1 trillion each year.
The government formerly drew up a plan to slash social security costs by ¥220 billion a year for a period of five years, which fell thorough because of vehement objections from the ruling coalition parties.
Bearing this in mind, the latest proposal seems to have deliberately avoided showing explicitly how the spending cuts should be put into force.
The government is set to finish drafting the fiscal reconstruction blueprint in June, mainly on the basis of proposals from CEFP's private-sector members.
For the government, which has set the goal of "making economic rebuilding and fiscal reconstruction compatible," however, spending cuts tending to put the brakes on expansion of business activity are hard to adopt. The government also considers it necessary to take into account criticism from the United States and others of any delay in Japan's recovery from deflation.
As Akira Amari, the state minister in charge of economic revitalisation, put it in a news conference on Thursday, "There would emerge adverse side effects if efforts are made to slash government expenditures [to achieve the primary budget balance goal]."
Finance Minister Taro Aso said at the CEFP meeting Thursday: "Germany has been suffering from a downturn in business activities in exchange for materializing its [positive] primary budget balance. We should be vigilant enough not to repeat Germany's mistake."
It is hard to assume that the national economy could attain a growth rate far in excess of expectations, and that rapid increases would be possible in tax revenues such as corporate and personal income taxes.
In the event of the government attempting to cut spending, there would certainly be strong opposition from the ruling coalition parties.
It is undeniable that the government will have to clear extremely high hurdles before reaching the goal of a primary budget surplus.