Budget rise eyed for ’08 seen as reform retreat

by Hiroko Nakata

The Finance Ministry proposed Thursday raising the fiscal 2008 budget to ¥83.06 trillion in what may signal a retreat from the government’s pursuit of fiscal reform.

The increase, the second in two years, is mainly being proposed to address ballooning social welfare costs in one of the world’s fastest-aging nations, and to provide larger subsidies to local governments as pressure builds for the government to narrow the wealth gap between big cities and ailing rural areas.

The budget is the first proposed since Prime Minister Yasuo Fukuda succeeded Shinzo Abe in September. It would be 0.2 percent higher than the initial ¥82.91 trillion budget proposed for fiscal 2007.

As a result, Japan’s primary deficit is likely to climb for the first time in five years, derailing the government’s efforts to achieve a primary balance — where expenditures other than debt-servicing costs are fully financed by annual tax revenues — in 2011.

Despite drafting the larger budget, Finance Minister Fukushiro Nukaga told a news conference that fiscal reform remained a priority.

“We should not give up our goal of fiscal reforms, although we have to accelerate economic growth at the same time,” Nukaga said. “We made the maximum effort to limit the outstanding amount of government bonds as well as the amount of their new issuance.”

After further talks are held with other ministries to make adjustments, the draft budget is expected to be formally endorsed by the Cabinet on Monday and submitted to the Diet when it convenes in January.

Japan has the largest public debt in the world, but the government is still groping for solutions at a time when the rapidly expanding elderly population is placing increasing demand on publicly funded social services.

Amid widespread expectations that a consumption tax hike will have to be part of the solution, the Liberal Democratic Party-New Komeito ruling bloc declined to state in its tax report earlier this month when and how much the tax should rise to avoid further alienating voters, especially should an election take place next year.

Meanwhile, under instructions from Fukuda to curb the issuance of new government debt and buoyed by slightly higher tax revenues, the government managed to reduce bond issuances by ¥84 billion to ¥25.35 trillion compared with the previous year.

Tax revenue is expected to edge up 0.2 percent to ¥53.55 trillion for 2008.

The ratio of bond issuances to expenditures meanwhile will edge down to 30.5 percent from 30.7 percent in fiscal 2007, although the figures show the government is still heavily reliant on public debt to pay its expenses.

To help redeem government bonds, the government will tap ¥9.8 trillion in reserves set aide in a special account within the fiscal investment and loan program, or “zaito.” As a result, the amount of outstanding government bonds is expected to rise moderately to ¥553.3 trillion by the end of fiscal 2008, up slightly from ¥546.7 trillion at the end of fiscal 2007.

According to the draft budget, the outstanding combined debt of the central and local governments is expected to reach around ¥776 trillion, or 147.2 percent of gross domestic product, by the end of fiscal 2008, compared with the ¥772 trillion, or 149.6 percent of GDP, projected for fiscal 2007, which ends on March 31.

Estimates of Japan’s debt-to-GDP ratio vary widely, but the government’s projected ratio will still be the worst among the Group of Seven industrialized nations, despite the reduction.

With the estimated rise in tax revenues, the primary deficit in fiscal 2008 is expected to reach ¥5.18 trillion, compared with ¥4.43 trillion in the initial fiscal 2007 budget.

A breakdown of the budget shows central government subsidies to local governments are expected to jump 4.6 percent to ¥15.61 trillion, up for the second year in a row.

The central government came under pressure to support ailing regions after the LDP crashed in the July Upper House election, particularly in rural voting districts that were dependent on the government’s oft-criticized public works spending and had been staunch LDP supporters in the past.

Social welfare spending will rise 3.0 percent to ¥21.78 trillion, as the rapidly aging population continues to lift outlays for pension and health insurance programs.

Meanwhile, public works spending will drop 3.1 percent to about ¥6.74 trillion. Wasteful projects for building roads, bridges, dams and highways in seldom used areas — a major factor in expanding Japan’s fiscal debt during the “lost decade” of economic stagnation through the 1990s — have dropped steadily in recent years in response to public criticism.

Defense spending will also slip, by 0.5 percent, to ¥4.78 trillion as public calls mount for the Defense Ministry to make the details of its expenditures on weapons and spending to support U.S. forces in Japan more transparent.

The ministry has become embroiled in bill-padding cases that allegedly involved conflicts of interest, particularly between defense equipment trading house Yamada Corp. and former Vice Defense Minister Takemasa Moriya.

The government will also cut official development assistance by 4.0 percent to ¥700.2 billion. But it will increase spending on other financial support, including ¥362.7 billion more for the International Development Association and ¥47.5 billion for the African Development Fund.

Extra budget OK’d

An ¥895.4 billion supplementary budget for the current fiscal year through next March was approved Thursday by the Cabinet to enhance disaster prevention measures and cushion the impact of high crude oil prices on small and medium-size firms.

The size of the fiscal 2007 supplementary budget is far smaller than the ¥3.77 trillion additional budget for fiscal 2006.