Cost of putting off reform

The draft government budget for fiscal 2015, compiled this week by the Abe administration, paints a positive picture of increased tax revenue through economic growth taming the rise in public debt. But not much effort seems to have been made to rein in government spending to restore the nation’s fiscal health.

General-account expenditures will rise by nearly ¥500 billion from the current fiscal year to a record ¥96.34 trillion. Tax revenue is estimated to rise by ¥4.52 trillion to ¥54.52 trillion, the highest level in 24 years, and the issue of new government bonds to finance the revenue shortfall will be reduced to ¥36.86 trillion, the first time in six years the bond issue will fall below ¥40 trillion. The government says the tax revenue increase will bring its goal of halving the primary balance deficit as measured against gross domestic product in fiscal 2015 from the 2010 levels within reach.

Corporate tax revenue has indeed been on the rise as earnings of major companies have sharply improved under “Abenomics” policies. Last April’s consumption tax hike has also increased revenue; its full effect on state coffers will arrive in the coming fiscal year. At least part of the anticipated improvement in the government’s fiscal health is a result of the greater financial burden placed on households.

Meanwhile, trimming government expenditures does not appear to be the priority of Prime Minister Shinzo Abe, who has championed aggressive fiscal stimulus as a key pillar of his economic policy. The largest-ever fiscal 2015 budget comes on the heels of a ¥3 trillion extra budget for the current fiscal year to stimulate the slowing economy. Together, total spending will amount to nearly ¥100 trillion.

The fiscal 2015 budget balloons to the record amount as the rise in social security expenses continues unabated with the graying of the Japanese population. The defense budget will rise by 2 percent to a record ¥4.98 trillion for the third straight year of increase under the Abe administration, and public works spending will also slightly increase to nearly ¥6 trillion.

The estimated tax revenue increase marks a progress toward fiscal rehabilitation. But the loose cap on expenditures raises questions of whether the Abe administration feels an appropriate sense of crisis over the nation’s fiscal health. It’s estimated that the outstanding amount of government bonds will reach a record ¥807 trillion at the end of fiscal 2015, with the overall debt reaching ¥1,035 trillion. The ¥4.387 trillion cut in the issue of new bonds from fiscal 2014 will be just a drop in the ocean.

Abe, meanwhile, has postponed the second phase of the planned consumption tax hike to 10 percent by 18 months to April 2017, while pushing for more than ¥400 billion in net cuts in corporate tax over two years beginning in fiscal 2015. Abe has said his administration will stick to the government’s next goal of eliminating the primary balance deficit in 2020 — which is now deemed uncertain — and come up with specific programs to achieve that by this summer.

Fiscal consolidation will depend greatly on curbing social security expenses that are rising with the rapid aging of the population. Money needed to run the pension, medical services and nursing care systems is ¥120 trillion a year. Revenue from premiums pays for only about 60 percent of the cost with much of the remainder being covered by taxpayer funds and government debt. The annual total expense for social security is forecast to rise by about ¥30 trillion 10 years from now.

Social security expenses in the fiscal 2015 budget represents a ¥1 trillion increase from the current year to ¥31.5 trillion. While the compensation for nursing care service operators is being reduced and a cap on an increase in pension benefits will be introduced, full-scale reform of the social security programs remains on the back burner.

To reform the current system, which relies on debts to sustain the system, the only path forward will be to either curb benefits and services or to increase the burden on program beneficiaries. To put its fiscal house in order, the government cannot afford much longer to put off painful reforms.