Deficit reduction to fall short

Kyodo

The government will fail to achieve its self-imposed target for reducing the budget deficit in fiscal 2020 despite the consumption tax increase, according to an official estimate made available Thursday.

The goal is to achieve a primary budget surplus for the central and local governments in fiscal 2020 after halving the deficit as a percentage of nominal gross domestic product in fiscal 2015 from the fiscal 2010 level. A primary budget surplus means the country can finance government spending, except for debt-servicing costs, without issuing new bonds.

Under a conservative estimate, however, the government could log a primary budget deficit of about ¥15.4 trillion in fiscal 2020. The fiscal 2015 deficit halving goal could be achieved as the government continues to cap spending amid an expected increase in tax revenues. The estimates, to be reported to a Cabinet meeting Friday, are based on the assumption that the central government will cap annual policy spending at ¥71 trillion over the three years through March 2016 to maintain fiscal discipline.

The 5 percent consumption tax will rise to 8 percent in April 2014 and then to 10 percent in October 2015 to cope with swelling social security costs. I t will be the first hike in the tax since April 1997.

As a result of the tax increase, the primary budget deficit as a percentage of nominal GDP could fall to the target of 3.2 percent in fiscal 2015 from 6.4 percent in fiscal 2010. The fiscal 2015 deficit is estimated to be ¥16.1 trillion against ¥29.7 trillion in fiscal 2012.

But increasing social security costs would weigh heavily on the economy, leaving the heavy primary budget deficit equal to 2.8 percent of nominal GDP in fiscal 2020.

In this scenario, the government estimates GDP would grow at an average annual rate of slightly more than 1.0 percent in real terms or around 1.5 percent in nominal terms during the period through fiscal 2020. To meet the fiscal 2020 goal of achieving a primary budget surplus, an additional consumption tax hike of 5.6 percentage points would be necessary, according to the estimate. The government is expected to spur efforts to trim spending and boost economic growth to increase tax revenues.