The government served up a fiscal reconstruction plan Tuesday that calls for achieving a surplus in the primary budget by the end of fiscal 2020 and keeping new bond issuance below this fiscal year’s ¥44 trillion, but experts say the outline lacks specifics on how to curb the massive national debt or raise taxes.
The long-term fiscal management plan, approved by the Cabinet earlier in the day, appears to focus on improving the primary balance, under which revenues cover expenditures excluding interest payments on bonds and bond redemptions.
The government seeks to halve the primary balance deficit, estimated at ¥30.8 trillion for fiscal 2010, or 6.4 percent of gross domestic product, by fiscal 2015 and achieve a surplus by the end of fiscal 2020. Then it will strive to reduce the national debt, which now amounts to some 180 percent of GDP.
“The Toronto G20 summit will be held soon. We will soundly explain our plans there and hope to gain trust from the market and other countries,” Finance Minister Yoshihiko Noda said after the Cabinet meeting.
The fiscal rehabilitation plan was announced just ahead of Prime Minister Naoto Kan’s departure to Canada later this week to attend the summit of the Group of 20 major economies and emerging powers.
The plan’s feasibility, however, is already in question.
For instance, the Cabinet Office disclosed a model showing that if the economy grows 2 percent in real terms until 2020 in accordance with the 10-year growth strategy announced last week, the primary balance would still be ¥13.7 trillion in the red.
Because the scenario is based on the premise that the tax and other situations will stay as they are now, the consumption tax would have to be raised to balance the budget.
On tax reform, however, the plan doesn’t give a timeline, except to note a “drastic tax reform plan should be decided as soon as possible,” while Kan has said Monday it would take at least two to three years for a tax hike to happen.
Kan suggested 10 percent could be considered as “a reference” target for raising the 5 percent tax, but the fiscal reform plan doesn’t include specifics.
The medium-term fiscal framework in the plan sets the budget drafting process for the next three years. Under it, other than keeping issuance of new government bonds below ¥44 trillion, expenditures excluding bond payments will be capped at ¥71 trillion.
Asked how the government will manage to achieve a primary balance surplus, as the plan lacks specifics, Noda said, “It is the responsibility of politicians to realize the scenario through expenditure and revenue reforms.”
Hisakazu Kato, an economics professor at Meiji University and an expert on finance, said the plan is overly optimistic and appears unfeasible.
He said it should have included a specific target for reducing the national debt that now hovers at 180 percent of GDP.
“While the market will be watching the public debt as a percentage of GDP, drafting a plan that holds out the possibility of piling up debts in the next 10 years is really questionable,” Kato said.
The 2020 goal to achieve the primary balance surplus is lax, he said, noting the same goal was set in 2006 by Prime Minister Junichiro Koizumi’s Cabinet, with the end of fiscal 2011 being the target.
Kato said the government should not only raise the consumption tax but also cut spending and offer specifics, which the plan fails to provide.