KOIZUMI'S 'GRAND DESIGN' DRAWS SKEPTICISM

Spending cuts, deferring sales tax hike, get nod

by Yumi Wijers-Hasegawa

The Cabinet on Friday approved an economic policy guideline for 2006 aimed at shoring up the government’s woeful finances with spending cuts and tax revisions, but leaves the dreaded consumption levy hike for a later administration to deal with.

The guideline, which will be used to compile the fiscal 2007 budget, calls on the government to reduce spending by 11.4 trillion yen to 14.3 trillion yen in the next five years by slashing 1.6 trillion yen in social security costs, 2.6 trillion yen in civil service payrolls, and 3.9 trillion yen to 5.6 trillion yen from public works outlays.

It is estimated the spending cuts will cover more than 70 percent of the 16.5 trillion yen in cuts the government needs to achieve a surplus in the primary balance of the combined central and local government budget by 2011.

The primary surplus excludes the cost of interest payments on government debt and new debt issues.

The government’s calculation assumes it will achieve nominal economic growth of 3 percent a year.

Prime Minister Junichiro Koizumi told the media Thursday he was “happy that the (ruling Liberal Democratic) Party was able to cut so many different types of demands.”

The remainder of the 16.5 trillion yen shortfall, about 2.2 trillion yen to 5.1 trillion yen, is expected to come from tax hikes.

While only a 1 to 2 percentage point hike in the 5 percent consumption tax is deemed needed to achieve a primary balance, experts said a bigger one will be necessary in the future to erase Japan’s huge long-term debt, which is expected to expand to 775 trillion yen by the end of fiscal 2006.

The guideline also mentions the need to allot revenue from the consumption tax to cover snowballing social security costs.

But with an election looming next summer, the ruling coalition has left the unpopular task of raising taxes to a later administration, with the guideline stating that “financial resources will become necessary in fiscal 2009″ to increase the government’s contribution to the basic national pension program.

The guideline also said the government must reduce size of its asset portfolio by about 140 trillion yen by the end of fiscal 2015 — by selling office buildings and housing for civil servants — and use the revenue for debt redemption.

But while the government plans to slash official development assistance by 2 percent to 4 percent, it has allowed for a 1.1 percent increase, which is within the guidelines’s projected range of economic growth, to the science and technology budget, because “the advancement of science and technology holds the key to our country’s future development.”

In addition to slashing social security costs, the guideline specifically mentioned the need to establish a social safety net to help those considered extremely vulnerable and to support those who fail to find jobs — especially women, the elderly and youths.

Hideo Kumano, chief economist at Dai-ichi Life Research Institute, Inc., said that while Koizumi’s “grand design” looks nice, the ruling party is fobbing off many of its biggest problems on a later administration, especially the tax hike.

“The government made a sweeping announcement of a vast cut in the coming five years, which looks nice, but to apply that to a year-to-year budget will be quite tough for the coming government,” Kumano said.

But on the plan to unload government assets, Kumano asked, “Is there a market for as much as 140 trillion yen in assets? The government might be able to avoid the risk of a rise in interest rates, but the buyer won’t. . . . The government needs to sort out a lot more details to carry out such plan.”

Regarding the fiscal 2007 budget, a Cabinet Office official said that compared with fiscal 2002, when the combined budget deficit of the central and local governments equaled 5.7 percent of GDP, fiscal 2007 will see a considerable improvement with the deficit at about 2.4 percent of GDP, thanks to cost-cutting and higher tax revenues.

But despite the improvement, the official said next year’s budget will be drawn up under “strict standards” because it will be the starting point of the new reform program for the following five years, and therefore crucial to achieving a primary balance.