The Abe Cabinet on Aug. 8 endorsed a medium-term financial reconstruction program. But the program is not adequate in presenting concrete measures designed to restore health to Japan’s financial conditions.
The central government’s accumulated debts topped ¥1,000 trillion and reached ¥1,008 trillion as of the end of June, twice the nation’s gross domestic product.
The International Monetary Fund (IMF) estimates that the debts will climb to a level close to 2.5 times the nation’s GDP by the end of 2013. The government needs to present a concrete path toward financial reconstruction, with firm commitment to eradicating wasteful use of public money.
The financial reconstruction program calls for halving the deficit in the primary balance of the central and local governments by the end of fiscal 2015 and reducing the deficit to zero by the end of fiscal 2020. The primary balance is obtained by subtracting debt services costs from revenues — excluding revenues from bond issuance. The program means that the central government must improve the balance in its budget by ¥4 trillion each in fiscal 2014 and fiscal 2015. The amount of bond issuance must be lower than in the previous fiscal year.
The program does not include concrete measures that the government will take to halve the deficit in the primary balance. Furthermore the government admits that even if Japan’s economy continues to grow 3 percent in nominal terms, it will be difficult to reduce the deficit to zero in fiscal 2020.
Means to improve the health of Japan’s state coffers include tax increases and spending cuts. But the financial reconstruction program has an uncertain factor. At this stage, the government has not decided what to do with a plan to raise the consumption tax rate from the current 5 percent to 8 percent from April 2014. It plans to make a decision on whether to go ahead with the plan as scheduled or to postpone it around October.
The IMF thinks that the Japanese government should raise the consumption tax as originally planned. A second round of the consumption tax raise, which will increase the tax rate to 10 percent, is scheduled to take place in October 2015.
The problem is that the government is lax in restraining spending. Instead of using a surplus of ¥1.3 trillion from the fiscal 2012 budget to redeem bonds, for example, it will use it in a supplementary budget for fiscal 2013. The guideline for budget requests for fiscal 2014 calls for a reduction of some 10 percent from the initial fiscal 2013 budget in discretionary expenditures, including public works spending. But it sets aside ¥3.5 trillion for special projects for economic growth and for anti-disaster and other priority projects. It also sets no ceiling for requests related to reconstruction related to the 3/11 disasters.
The government must be serious in working out concrete steps designed to achieve the difficult task of achieving both financial reconstruction and steadfast economic recovery.