LDP Secretary General Koichi Kato indicated Friday that the government may lift a division between deficit-covering bonds and construction bonds so more public funds can be injected into the economy.”Removing the division is a matter that has lingered for a long time in the minds of a number of senior LDP politicians,” Kato told reporters. “There is no difference between the two kinds of bonds in terms of their nature as government debt, and the division has hindered fiscal flexibility of the nation’s coffers.”However, the Liberal Democratic Party’s No. 2 man added that party discussions have not begun on the matter. The remark comes as some LDP legislators and the opposition camp demand tax cuts in addition to those already announced by Prime Minister Ryutaro Hashimoto. In mid-December, Hashimoto announced plans for a 2 trillion yen cut in income and residential taxes that would be covered by issuing deficit-covering bonds.The planned reductions are a drastic shift in the government’s policy of fiscal restraint — a Hashimoto priority. The administration succeeded in late November in enacting an austerity law that obliges the government to stop issuing deficit-covering bonds by fiscal 2003.The gloomy economy, however, has placed Hashimoto in a dilemma over whether to promote fiscal restraint or implement more pump-priming measures. There are two kinds of government bonds, deficit-covering bonds and construction bonds. The former is used for any purpose, but the latter is used only to cover cost of public works projects.If restrictions on the bonds are lifted, construction bonds could be used for other purposes, including additional tax cuts. However, if the idea is realized, it may cross the boundaries of the fiscal austerity law because, as Kato noted, construction bonds are also government debt and no different from deficit-covering bonds in real terms.

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