On paper, the draft of the fiscal 2012 budget appears to indicate Japan has found a way to trim about ¥2 trillion in spending compared with the current year, but in reality the national debt is snowballing as bond issuance will exceed tax revenues for the third year in a row.
This wasn’t how it was supposed to be. Prime Minister Yoshihiko Noda, a fiscal hawk and former finance minister, said earlier this month that it was imperative to get the country’s public finances back on track.
“We need to be very aware that the market is examining if we are a nation that can maintain fiscal discipline,” Noda said at a meeting earlier this month.
But while the ¥90.3 trillion general account for fiscal 2012 is smaller than the ¥92.4 trillion for the current fiscal year — the first year-on-year drop in six years — experts say there is more at work than meets the eye.
For one thing, all spending related to rebuilding from the Great East Japan Earthquake, some ¥3.78 trillion, was set aside in a separate budget account.
For another, the government decided to pay half of next year’s pension benefits with debt, by issuing ¥2.6 trillion in “special bonds” that also won’t be counted as fiscal 2012 spending.
“To be accurate, government spending isn’t on the decline,” Hisakazu Kato, a finance professor at Meiji University, told The Japan Times. “On the contrary, it is continuing to expand.”
A case in point is the ¥44.24 trillion in bonds that will be issued next year to make ends meet. That number is down slightly from ¥44.29 trillion in fiscal 2011, when tax revenues will likely come to about ¥40.9 trillion.
For fiscal 2012, the government expects to collect around ¥42.3 trillion in taxes but issue nearly the same amount worth of bonds, passing on the burden of repayment to future generations.
In fact, 49 percent of the general spending in 2012 will be covered by government bonds — the highest ratio ever.
The ruling Democratic Party of Japan’s determination to cut public spending, a promisethe party made before its historic victory in the 2009 Lower House election, appears to be fading.
Last week, when asked whether the government had succumbed to pressure to spend, Finance Minister Jun Azumi said “that isn’t the case at all.” But on Saturday, he acknowledged that Japan’s fiscal balance is “reaching the limit” and that the government must lower its reliance on debt.
The reason the government failed to shrink the budget is evident in the draft, which includes funds for certain items that DPJ members couldn’t give up and were ultimately left untouched.
One such controversial item is the ¥1.8 billion in funds to resume the decades-old Yanba Dam project in Gunma Prefecture, a decision that flies in the face of the party’s vow to kill off pork-barrel projects and a reversal of a major DPJ campaign pledge in the 2009 general election.
Meanwhile, plans to apply a ¥100 surcharge to hospital outpatients to help offset skyrocketing social welfare costs was scrapped due to internal opposition.
“My concern is that there is no clear sign in the budget draft that the government pushed itself to the limit and worked hard,” said Masaya Sakuragawa, an economics professor at Keio University. “DPJ members were simply afraid of losing votes” by trimming spending, he added.
The consequences could be severe. As Europe continues to struggle amid its sovereign debt crisis, some economists warned that the worst is yet to come. Prime Minister Noda has repeatedly said the debt quandary is not limited to Europe and that Japan should seriously consider correcting its fiscal balance before the other shoe drops.
But the Finance Ministry on Saturday projected that government debt will swell to a record ¥937 trillion by the end of fiscal 2012, or about 195 percent of gross domestic product.
“The key for the government is to clearly state when and how it will be asking the public to shoulder the burden. This needs to be laid out quickly,” Meiji University’s Kato said.
Noda is set to submit a bill by March for hiking the consumption tax rate, which currently stands at 5 percent.
“If there is any sign that the government will fail to properly raise the consumption tax, it could push up bond yields. That would cause serious consequences for Japan,” Kato added.
Keio University’s Sakuragawa proposed that, in addition to raising the consumption tax, the government should consider other measures, including slashing bureaucrats’ salaries.
“The government needs to be specific on how to raise enough money,” Sakuragawa said.
“Things need to change drastically within the next two to three years. If not, the likelihood of an economic collapse will become real.”