Short of anticipated revenues thanks to a delay in the consumption tax hike, and amid a snowballing social security bill, the Abe administration had a tough time drafting the fiscal 2015 budget and making it jive with its ambition to rehabilitate the nation’s finances, analysts say.
A key question in drafting the record ¥96.3 trillion budget was how to make up for the originally projected ¥1.5 trillion in tax revenue lost because Prime Minister Shinzo Abe postponed the 2 percentage point hike, to April 2017 from October this year. That revenue was earmarked for social security costs, which represent one-third of the latest budget.
“My impression is that the administration gathered up whatever it found available to make up for this ¥1.5 trillion” in lost revenue, said Takero Doi, a public finances professor at Keio University. Doi believes the administration aimed to meet the goal of cutting the primary budget deficit by half from the level in fiscal 2010 by any means available. There is evidence for this, he said, in the increase in nontax revenue.
Overall, the budget is seen as saving face for Abe, who aims both to revitalize the economy and improve the tattered fiscal balance, the worst among developed nations.
However, measures to improve fiscal health include one-off items to finance the deficit.
While Doi acknowledged the administration’s effort in improving the nation’s fiscal health, especially in the key gauge of the primary budget balance, which is now cut to half the level in fiscal 2010, Tokyo University professor Toshihiro Ihori questioned theidea of selling stocks to boost nontax revenue. The revenue includes ¥200 billion in proceeds from the sale of NTT Corp. shares and an increased mandatory payment of profits from the Bank of Japan, likewise projected at ¥200 billion.
“When the government sells stocks, it brings in revenue, but it means giving up potential options for the corresponding amount of revenue in the future,” Ihori said. “You’re obtaining revenue that belongs to the future. In that sense, it’s like issuing fresh bonds and repaying them in the future.”
While the draft budget meets the projection, government finances remain in tatters. Doi said a key for fiscal rehabilitation is to cut spending, especially on social security.
“If you think boosting the economy would balance the primary budget, you’re wrong,” he said. “The government needs either to cut spending or boost tax, and at least it needs to cut spending before turning to additional tax cuts. Clearly, limiting social security costs is an urgent task.”
The administration has long aimed at remedying a deficit in the primary budget balance, which compares total revenue minus borrowings against total spending minus debt repayment including interest payments. A deficit here means Japan is unable to cover its spending by tax revenue alone, forcing the nation to issue new bonds to cover not only its spending but also the servicing of existing bonds.
And outstanding government bonds now represent more than double the nation’s gross domestic product, the worst level among advanced nations.
To contain the surge in debt, a key goal is to balance the primary budget balance, especially as the government already failed to achieve the previous balancing goal in fiscal 2011 amid global economic crisis. Last July, the administration worked out a medium- to long-term fiscal projection which sets a goal of achieving a primary budget balance by fiscal 2020.
The projected total of ¥54.5 trillion tax revenue for fiscal 2015 falls short by ¥1.1 trillion of the medium- to long-term projection for the nation’s fiscal balance that includes a boost from the sales tax hike. But the administration managed to meet the primary balance projection by boosting total revenue by ¥600 billion through nontax revenues, as well as cutting spending by ¥1 trillion.