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FOCUS: Japan drags feet on fiscal consolidation

  • December 21, 2018
  • , Kyodo News , 3:22 p.m.
  • English Press

The Japanese government’s budget for fiscal 2019 makes abundantly clear where Prime Minister Shinzo Abe’s priorities lie when it comes to the economy.

 

The spending plan, which received Cabinet approval on Friday and is now headed to the Diet in January, shows government outlays rise above 100 trillion yen ($900 billion) in an initial budget for the first time, pushed over the threshold by 2 trillion yen in funding for measures to lessen the shock of raising the consumption tax in October.

 

The colossal sum is a testament to Abe’s keenness to prevent the tax hike from putting the brakes on the economy by triggering a plunge in domestic demand, as happened after the previous increase in 2014.

 

But it also means Japan makes little progress in shedding its unwelcome status of having the worst fiscal health among major industrialized countries.

 

Abe has promised to achieve fiscal consolidation by bringing the primary balance — tax revenue minus expenses other than debt-servicing costs — into the black by the target year of fiscal 2025.

 

Under the latest budget for the year beginning in April, the primary deficit is set to shrink from 10.4 trillion yen this fiscal year to 9.2 trillion yen.

 

This will be made possible by tax revenue climbing to a record high for the first time since fiscal 1990 before the bursting of the asset bubble, lowering the government’s issuance of new bonds.

 

But the government continues to rely on debt to fund about a third of the budget. By its own reckoning, without an improvement in cash flow it will run a primary deficit of at least 2.4 trillion yen in fiscal 2025, a figure that could fall further into the red after official growth estimates were downgraded this month.

 

The 2 trillion yen tranche of the budget covers a slew of measures including free pre-elementary education, a rebate program for purchases made by cashless methods such as credit card or smartphone, and spending on public works to improve resilience against natural disasters.

 

“We’ve taken sufficient steps to overcome the economic impact of the consumption tax increase,” said Finance Minister Taro Aso on Friday.

 

But skeptics say the measures have been orchestrated to win favor among voters for Abe’s Liberal Democratic Party ahead of upper house and local elections next year.

 

The Abe administration is “using the tax hike to purposely stoke fear among the public and acting as if it is coming to the rescue with these measures,” says Takahide Kiuchi, executive economist at the Nomura Research Institute and a former board member at the Bank of Japan.

 

“Next year’s elections are clearly in consideration here.”

 

Japan’s prospects of achieving fiscal health could worsen in fiscal 2020, given the government has already announced plans to ramp up spending on public works and take additional steps to mitigate the impact of the tax increase.

 

The hike was intended to increase tax revenue to help cover social security costs that are swelling along with the number of elderly in the country. But Kiuchi says that if future budgets continue to grow in a similar fashion to the fiscal 2019 budget, this could negate the increase in tax revenue.

 

“What were initially meant to be one-off measures could be extended if the government deems it necessary, for example, to underpin the economy after the 2020 Tokyo Olympics. It could just keep giving reasons to increase spending.”

 

With defense spending also climbing as Japan steps up purchases of state-of-the-art stealth fighters and seeks deployment of aircraft carriers, fiscal consolidation seems increasingly lower on Abe’s agenda.

 

This may be because with his final term as LDP chief and therefore, prime minister, set to end in 2021, the politically thorny task will fall on his successor.

 

==Kyodo

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