Tokyo–Japan’s record budget plan for fiscal 2022 has laid bare the urgent need to have real discussions about how to restore its debt-ridden finances, but the chance of seeing them anytime soon seems very slim, at least until the House of Councillors election scheduled for July next year.
The draft budget, approved Friday by the Cabinet of Prime Minister Fumio Kishida, totals 107.60 trillion yen ($940 billion), marking a record high for 10th straight year, while there are deep-seated concerns that the government may spend more in the fiscal year starting in April through extra budgets, as in recent years.
Still, politicians tend to have reservations about bringing the issue of fiscal reconstruction under the spotlight especially in the run-up to an election, as it reminds voters about the possibility of facing higher taxes.
“Prime Minister Kishida has avoided such debate and is expected to do the same for the time being,” said Yuichi Kodama, chief economist at Meiji Yasuda Research Institute.
The approval of the initial budget plan came less than three months after Kishida took office and nearly two months after the Liberal Democratic Party and its junior coalition partner Komeito retained a majority in the House of Representatives, the more powerful lower chamber of parliament, in the general election.
“Originally, Mr. Kishida is said to be a person who emphasizes fiscal discipline. After the next upper house election, there could be no national elections for a while, so I hope he starts policy debates over how to secure financial resources if the ruling parties win the election, at the latest,” Kodama said.
In Japan, upper house elections are held every three years to appoint half the chamber to six-year terms, while lower house elections take place every four years unless the prime minister dissolves it.
As the LDP pledged during the campaign for the Oct. 31 general election, the government drew up a large-scale stimulus package last month to support the COVID-19-hit economy.
It then compiled a 35.99 trillion yen extra budget for fiscal 2021 earlier this month, including 22.06 trillion yen in new debt issuance.
Although the number of new COVID-19 cases has been at low levels in Japan in recent weeks, 18.61 trillion yen under the extra budget was earmarked for measures to curb the spread of the coronavirus and assist medical institutions.
Meanwhile, the extra budget included some outlays that seem to be nonurgent, and the size of this fiscal year’s whole budget eventually totaled 142.60 trillion yen, out of which only 63.88 trillion yen is estimated to be financed by tax revenue.
“While trying to keep the size of an initial budget as small as possible, it has become an every-year practice for each administration to form extra budgets to roll out its preferred policy measures,” said Takuya Hoshino, a senior economist at the Dai-ichi Life Research Institute.
“This is a major reason why it is easy for government spending to swell,” Hoshino said, noting that the wish of the Finance Ministry to keep the size of initial annual budgets smaller accords with that of the ruling coalition to come up with unique economic and welfare policies by extra budgets.
Japan’s public finance law limits the purpose of formulating a supplementary budget to “especially vital expenses” caused by events that occurred after compiling the initial budget.
Hoshino thinks the government’s way of planning how to use money is not wise enough, proposing that outlays for long-term growth strategies such as those for decarbonization and digitalization should be included in initial budgets.
“Such expenditures should be planned on a multiyear basis,” he said, as it would help to induce more investment from the private sector and companies will likely find it easier to make business plans.
But if the government includes greater expenses in initial budgets, it will become more difficult to meet the goal of putting its primary balance — tax revenue minus expenses other than debt-servicing costs — into the black by fiscal 2025.
Under the fiscal 2022 budget, a primary deficit of 13.05 trillion yen is projected. It will improve from the 20.36 trillion yen deficit under the fiscal 2021 initial budget but still worse than the 9.63 trillion yen in red ink for fiscal 2020.
The government has said it will examine the fallout from the coronavirus pandemic on Japan’s economy and finances, suggesting that achieving a primary surplus in fiscal 2025 in line with its goal could be delayed.
However, Finance Minister Shunichi Suzuki said at a press conference after Friday’s Cabinet approval that the goal does not need to be reviewed “at this point.”
Hoshino believes the government sticking to the primary balance goal will not lead to “wise fiscal spending” because its investment for economic growth and efforts to aim for a primary surplus will both be tepid.
Kodama has a contrasting view, saying, “No one may believe that a primary surplus is achievable, but the biggest meaning of maintaining this goal is to show that the government has a will to rebuild the country’s finances.”
“If it was retracted, that could look as if Japan has brought down the banner of fiscal consolidation,” he said.