Unless the government changes its optimistic projections, no proper path to fiscal consolidation will appear. The government must face up to reality and present concrete measures for reform to avoid passing the fiscal burden along to future generations.
The Cabinet Office has released its latest fiscal projection over the medium and long term that is revised twice yearly. According to the new projection, the primary balance for the central and local governments is expected to remain in the red, with a ¥2.9 trillion deficit in fiscal 2025, which is the central government’s target year for achieving a surplus, and to show a surplus in fiscal 2027.
Although in the previous projection in January the budget surplus target was estimated to be achieved in fiscal 2029, the latest projection expects it to arrive two years earlier. The Cabinet Office said this is because national tax revenue in fiscal 2020 hit a record high, mainly due to an increase in exports.
The primary balance is an indicator of how much government policy spending can be secured by tax revenue or other means without relying on debt.
In fiscal 2020, the government compiled a supplementary budget three times to deal with the novel coronavirus pandemic, causing debt to swell and the primary balance’s deficit to expand to ¥56.4 trillion. The latest projection estimates the deficit will shrink rapidly from this fiscal year, but this cannot be said to be realistic.
Prime Minister Yoshihide Suga said that the projection showed that “it would be possible to turn the primary balance into a surplus in fiscal 2025 by achieving economic growth and continuing expenditure reforms.” However, it must be said that the prime minister lacks awareness about the primary balance.
According to the latest projection, the economic growth rate, which is the premise of the projection, is expected to exceed 3% in nominal terms, except for fiscal 2022. Based on this, it is said the tax revenue will increase.
However, in recent years, the nation’s potential growth rate, which reflects real economic capacity, has been stagnant below 1%. If a nominal growth of 3% were to last, it would be the first time since the bubble economy.
The projection said that decarbonization and digitization, which have been included in the signature policies of the Suga Cabinet, will be the driving forces for growth. However, measures to promote them have only just begun.
After 2022, baby boomers will begin to be 75 or older and with this late-stage elderly population social security costs are expected to increase. But measures to contain the costs are unclear.
Within the ruling parties, there are mounting calls for large-scale economic stimulus measures ahead of the next House of Representatives election. If the optimistic budget outlook were to lead to a loosening of fiscal discipline, this would become a serious problem.
The outstanding long-term debt of the central and local governments amount to about ¥1.2 quadrillion, more than twice Japan’s gross domestic product. This is the worst level among developed countries.
Bringing the primary balance back into the black is only the first step toward fiscal reconstruction. Unless the government is able to even present concrete measures to realize a surplus, it will be impossible to reduce the huge amount of debt.
The government said that it will reexamine within this fiscal year the timing of realizing the primary balance surplus.
It is essential to take this opportunity to reconfirm the fiscal situation and devise measures for revenue and expenditure reforms.
— The original Japanese article appeared in The Yomiuri Shimbun on Aug. 3, 2021.