With the issuance of new bonds topping government revenue for the second consecutive year, the fiscal 2011 budget draft approved Friday by the Cabinet demonstrates a lack of effort to ward off a looming fiscal crisis, experts warned.
They said the Democratic Party of Japan-led administration must buckle down and take more concrete actions — including preparing for a consumption tax hike.
“In terms of the fiscal reconstruction, it seems no efforts have been made,” said Masaya Sakuragawa, an economics professor at Keio University.
He said tax revenue has in fact increased by ¥3 trillion thanks to a recovery in companies’ profits, but the basic structure of the draft is almost the same as the previous year’s budget: ¥92 trillion in total spending and ¥44 trillion in government bond issuance.
“Economic conditions were better than last year, so there is a chance to reduce the deficit,” but the draft turned out to be more of the same, with little effort made to improve fiscal conditions, Sakuragawa said.
Government debt has been snowballing. It will have grown to ¥891 trillion at the end of March, about 184 percent of Japan’s gross domestic product.
Last year the government had tax revenue of ¥37.3 trillion and sold ¥44.3 trillion in government bonds. This year’s tax revenue increased to ¥40.9 trillion, but the government still sold ¥44.29 trillion in bonds.
This is “an unusual situation . . . almost half of the budget is financed with government bonds. So that half of the (financial burden) will by shouldered by future generations,” said Hisakazu Kato, an economics professor at Meiji University and an expert on finance.
This is the first budget written from scratch by the DPJ-led government. This year’s budget was initially drafted by the Liberal Democratic Party-led administration before it lost power in August 2009.
The DPJ won that election with promises of drastically restructuring the budget, but Kato said it is hard to see any reform in this version.
“Rather than restructuring, it seems the DPJ is just adding its policy expenditures on top of the budget, whose basis was created during the LDP era,” he said.
Kato also pointed out that the DPJ-led government wasn’t fully able to follow the fiscal management rules it adopted in June.
The medium-term fiscal framework plan sets the budget-drafting process for the next three years. It says other than keeping issuance of new government bonds below ¥44 trillion, expenditures excluding bond payments will be capped at ¥71 trillion.
The Cabinet barely met the cap but it failed to keep to the “pay-as-you-go” principle, which obliges the government to secure stable financial sources when launching new policies.
A notable example is the administration’s failure to find stable resources for the basic public pension system.
The government had pledged to raise its share of the pension system burden from one-third to 50 percent. The ratio was increased to 50 percent in 2009, which required additional spending of about ¥2.5 trillion, but the government has still been unable to secure stable, additional resources, and this year it again decided to tap one-time sources such as cash reserves in special government accounts.
During the budget drafting process, Finance Minister Yoshiko Noda indicated a sense of urgency to find a stable funding supply.
“Securing a financial source for the basic pension is really tough. I don’t intend to use this year’s method next year. We must tackle drastic reform of the tax system,” he said Dec. 16, a nod at laying the groundwork for raising the consumption tax.
Considering the severe fiscal situation and rising social security costs, “a tax hike is unavoidable,” Sakuragawa said, adding it’s a tough proposition to drastically cut government spending.
With the population of elderly on the rise, social security costs will swell. The fiscal 2011 draft budget estimates the overall cost at ¥28.7 trillion, an increase of ¥1.43 trillion from this year.
Kato of Meiji University said a consumption tax hike is indeed necessary, but it is also important to review and streamline social security, including the pension system.
Sakuragawa said the DPJ needs to come up with a clear road map for a tax raise and stick with it, as Prime Minister Naoto Kan at one point mentioned a sales tax hike but retreated after his party got stung in the Upper House election last summer.