Cabinet approves record ¥92 trillion budget

Debt issuance exceeds tax revenues for first time in postwar period

Compiled From Kyodo, Staff Report

The Cabinet approved a ¥92.30 trillion initial budget Friday for fiscal 2010 — the largest ever — allowing Prime Minister Yukio Hatoyama to fulfill his goal of winding down the drafting process by year’s end.

But the size of the general-account budget is larger than Hatoyama was hoping for, stoking long-simmering worries about Japan’s fiscal health.

By comparison, the initial budget for fiscal 2009 was ¥88.55 trillion and relied on unprecedented levels of fresh debt issuance and nontax receipts.

The economic slump is projected to bring tax revenues down to ¥37.40 trillion, the lowest since fiscal 1984.

As a result, the Cabinet will have to issue ¥44.30 trillion in new government bonds — an alarming increase of 33.1 percent on the previous initial budget.

The latest amount equals the sum of the bond issuance planned by the previous government for the initial budget, and the first extra budget for fiscal 2009.

In this regard, Hatoyama fulfilled his promise because he repeatedly vowed to cap new bond issuance at around ¥44 trillion to avoid eroding confidence in the bond market. But this is the first time since the war that new debt issuance has exceeded tax revenues on an initial budget basis, according to the Finance Ministry.

“There are some parts we reviewed, but I believe we can achieve most of them,” Hatoyama said after the Cabinet approved the budget.

Hatoyama, however, apologized for the backpedaling on some political pledges by his party, including cutting the provisional gas tax.

“In reality, the difficult economic situation made it unable for everything on our manifesto to materialize,” he said, explaining that public opinion, as well as the impact on environment conservation, were also reasons he decided to keep the gas tax.

He also said the government is not considering hiking the consumption tax for the next four years as promised during the general election campaign.

Meanwhile, the government also released its projection for the economy in fiscal 2010. The economy is expected to grow 1.4 percent in real terms in fiscal 2010 — the first expansion in three years — as exports recover and stimulus measures continue to buoy the economy.

Although the economy is likely to recover from the 2.6 percent contraction in gross domestic product projected for fiscal 2009, employment conditions are expected to remain severe and moderate deflation is likely to be seen, the government said.

General expenditures in the ¥92.299 trillion initial budget amount to ¥53.454 trillion, an all-time high and higher than the ¥51.731 trillion in the 2009 initial budget.

The budget for the year starting in April swelled, with new spending on campaign pledges by the Democratic Party of Japan ranging from providing a monthly allowance for each child of junior high school age or younger to introducing free high school education.

The DPJ, which swept to power in the August general election, drafted a budget for the first time, with hopes of stimulating domestic demand by providing more cash to households, instead of devoting trillions of yen to big public works projects.

Reflecting the DPJ’s motto of shifting the focus of spending “from concrete to people,” social welfare costs will grow ¥2.43 trillion, or 9.8 percent, to ¥27.27 trillion, accounting for over half of the core policy-related outlays for the first time.

In stark contrast, the government decided to slash spending on public works projects by ¥1.30 trillion, down a record 18.3 percent, from the initial budget of fiscal 2009 to ¥5.77 trillion.

Expenditures on public works shrank to the levels observed in the late 1970s, according to the ministry.

Still, to address even more serious economic problems in rural areas, tax grants from the general account to local governments will be increased by ¥904.4 billion from the year before to ¥17.48 trillion.

Debt-servicing costs will total ¥20.65 trillion, down more than ¥1 trillion from the Finance Ministry’s initial plan, on expectations that relatively low interest rates will remain in place.

The DPJ-led government managed to downsize the budget from ¥95.04 trillion, requested by ministries and agencies in October, but it remains uncertain whether the public and market players will be satisfied with the outcome, given that the ratio of total debt issues to total revenues has reached 48 percent, the worst on record.

The DPJ — though generous in offering support for child-rearing — could not avoid passing the increase in debt on to future generations.

On revenues, the government will secure a record ¥10.6 trillion from nontax receipts, including tapping into reserves and retained earnings in special accounts.

Of the ¥10.6 trillion, ¥4.8 trillion will come from the Fiscal Loan Fund Special Account and ¥2.9 trillion from the Foreign Exchange Fund Special Account.