Japan’s primary balance is once again set to miss its long-standing target of achieving a balanced budget by the year ending March 2026.

The primary balance, which excludes interest payments on public debt, is projected to remain in the red with a deficit of around ¥4.5 trillion ($28.8 billion) or minus 0.7% of gross domestic product in the fiscal year starting in April, according to the Cabinet Office’s latest mid-to-long term outlook report released Friday.

In its previous forecast in July, the government had predicted a surplus of around 0.1% of GDP for the year, meaning the country would finally hit its target for balancing the books at the primary level.

The latest projection reflects a bumping up of spending since the summer due to Prime Minister Shigeru Ishiba’s ¥13.9 trillion economic package and the likelihood that revenue will be affected by efforts to raise the tax-free income ceiling. The Cabinet Office now projects the goal to be met in the 2026 fiscal year.

Ishiba’s stimulus measures included costly initiatives aimed at reducing the hit from inflation, such as the resumption of subsidies for utility bills and cash handouts for low-income households.

Raising the tax-free income allowance, meanwhile, is a key demand of the Democratic Party for the People, a small opposition party that Ishiba’s minority government has courted to ensure passage of funding for his stimulus measures and for the annual budget.

The deterioration in the outlook will add to scrutiny of the nation’s commitment to improving its fiscal discipline. The country’s public debt load remains the largest among developed economies, exceeding twice the size of its economy. Progress to reduce it in recent years has been limited.

Japan initially aimed to achieve a balanced budget in fiscal year 2011 but has repeatedly pushed back the goal for over a decade. Some experts, including Mana Nakazora, chief credit strategist at BNP Paribas Securities, have warned of potential sovereign credit rating downgrades if the situation persists, though that kind of move may not be imminent.

The government said that Japan could achieve a primary balance surplus in the year starting in April 2026, as revenues are likely to increase while expenditures will be scaled back. In two growth scenarios, the surplus is expected to expand, the estimate showed.

The government’s transition growth scenario sees the nation’s economy expanding at an average real rate of around 1.5% in the late 2020s and beyond. In its high-growth scenario, the economy expands at an annual rate close to 2%.

In the baseline scenario of growth, weakening to around 0.5% to 0.6% from the late 2020s, the primary balance will fall back into the red after achieving a surplus.

An economic panel advising Ishiba said that the expected shortfall in fiscal 2025 will be the smallest since fiscal 2001, indicating some progress toward fiscal consolidation. In the meantime, the panel said it’s important to ensure confidence in the nation’s finance by analyzing the causes for missing the target.

Other estimates made by the Cabinet Office:

  • The inflation rate will likely stabilize at 2% over the long run in its growth scenarios
  • Wages are projected to increase by 2.8% in fiscal 2024 and fiscal 2025
  • Real GDP will likely expand by 0.4% in fiscal 2024 and 1.2% in fiscal 2025