DPJ's ¥71 trillion limit seen restraining economy

Abe to scrap budget spending cap for ’13

Kyodo, Staff Report

The administration to be headed by Liberal Democratic Party chief Shinzo Abe will scrap the spending cap on the annual budget to focus its efforts on reviving the economy, party sources said Wednesday.

Abe, scheduled to become prime minister and form his Cabinet Dec. 26, will review the so-called medium-term fiscal framework, the key guiding principles currently in place for curbing the swelling national debt, the sources said.

In a related move, LDP Vice President Masahiko Komura said the party aims to create a ¥10 trillion spending package for this fiscal year, which ends March 31, to finance public works projects, historically the LDP’s favorite pump-priming strategy.

The LDP has decided that its administration should be free from the current medium-term fiscal reform plan when formulating the extra spending package for this fiscal year and the regular budget for next year to combat the country’s long economic malaise, the sources said.

The government led by the Democratic Party of Japan, which suffered a crushing defeat in Sunday’s election, capped annual policy spending at ¥71 trillion, excluding debt-servicing costs, in an attempt to maintain fiscal discipline.

The new Cabinet is expected to present its budget policy for fiscal 2013 on Dec. 26, when Abe will be picked as prime minister by a formal vote in the Diet.

The Cabinet will likely decide on a new fiscal reform plan by the end of January to replace the medium-term framework, according to the LDP sources.

DPJ Prime Minister Yoshihiko Noda’s Cabinet approved in August a three-year framework starting in fiscal 2013. It also retained an annual cap on new bond issuance at around ¥44 trillion, the same as in fiscal 2012.

Based on the assumption that these spending restrictions will be carried out, the government released an estimate at the time that the primary budget deficit would be halved by fiscal 2015, the year the consumption tax is to be raised to 10 percent.

The government has pledged to halve the deficit as a percentage of nominal gross domestic product by fiscal 2015 from the fiscal 2010 level and achieve a primary budget surplus for the central and prefectural governments in fiscal 2020.

A primary budget surplus means finance government spending, except for debt-servicing costs, can continue without issuing new bonds.

Under this scenario, the government estimates that GDP will 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.

During campaigning for the Lower House election, the LDP promised it will aim to achieve nominal growth of more than 3 percent a year by introducing new economic steps.

Regarding the plan to draw up a ¥10 trillion extra budget, Komura told reporters the money will be spent on construction projects that enhance disaster prevention and response.

While the LDP has long been criticized for drying up government coffers through pump-priming projects, the DPJ tried to cut back on unnecessary public spending — without much success — through its “shiwake” screenings.