The government will forecast annual economic growth of around 1.3 percent in price-adjusted real terms for fiscal 2014, informed sources say.
The new estimate, to be announced later this month, will be an improvement on the more pessimistic projection of 1.0 percent growth issued in August.
Growth in fiscal 2014 starting April 1 is expected to be weighed down by drops in consumer spending and housing investment when the consumption tax hike to 8 percent kicks in that month. But the government believes the slowdown will be offset by the ¥5.5 trillion stimulus package hammered out earlier this month, the sources said.
It will also raise its forecast for nominal gross domestic product to about 3.3 percent from 3.1 percent, they said.
The new estimates will be adopted as early as Dec. 24, along with the draft budget for next year.
Next year’s budget is likely to expand “policy spending” to a record high of ¥73 trillion or so, driven by increases in social security and defense outlays, other sources said.
The government is also considering capping new issuance of government bonds at about ¥42 trillion — about ¥1 trillion less than the initial budget for this year, the sources said.
Because tax revenue is expected to grow along with the economic rebound and tax hike, the budget deficit for policy spending could improve by more than ¥4 trillion next fiscal year compared with 2013, they added.
The total size of the initial budget is expected to come in at ¥96 trillion to ¥97 trillion, including debt-servicing costs.
Japan has the worst fiscal health of the major developed economies. Its outstanding debt surpassed ¥1.011 quadrillion in September, forcing Prime Minister Shinzo Abe to address fiscal consolidation.
The central government’s tax receipts are likely to top ¥50 trillion for the first time in seven years in fiscal 2014, thanks to the tax hike and the projected growth in revenue from the corporate tax.
While securing the money needed to fund steps for shoring up the economy and ending nearly two decades of deflation, the Abe administration will use the expected increase in revenue to reduce Japan’s reliance on government bonds, the sources said.
Funding for social security, which at around 40 percent makes it the largest component of policy spending, is likely to top ¥30 trillion in fiscal 2104 as pension and medical costs continue to rise along with the rapid graying of the population.
Abe is also certain to raise defense spending amid tensions with China over ownership of the Senkaku Islands.
Policy spending requests from ministries and agencies have come to around ¥75 trillion — more than ¥4 trillion higher than for the initial fiscal 2013 budget.