Although the government faces two important goals — shoring up the fragile economy and cutting its enormous budget deficit — the cap on core fiscal 2004 budget outlays the Cabinet endorsed Friday only increases concern that neither can be achieved anytime soon.

What makes it hard for the government to reach these goals is its failure to effect reforms in key state expenditures, including the country’s rising social welfare costs and the central government’s huge financial aid to municipalities, economists say.

“The government move to cut spending (via the budget cap) gets attention, but how to reform the budget is still a mystery,” said Hideo Kumano, senior economist at Dai-Ichi Life Research Institute.

Kumano and other economists said the government should focus on reducing low priority expenditures to leave room for projects to stimulate the economy.

Prime Minister Junichiro Koizumi has failed to clarify how he will deal with the growing costs for social welfare services amid the nation’s rapidly aging population. The central government has meanwhile yet to unveil a schedule for paring back the subsidies it pays to local governments.

The Finance Ministry, which oversees the budget, and the welfare ministry, which opposes any cut in welfare services, were unable to strike a compromise as of Friday.

The approved budget framework merely says the government will cut medical services and pension payments by 220 billion yen, without specifying how this would be done.

The government also failed to declare how it would slash subsidies and tax grants to local governments in the next fiscal year, even though it announced in June that it will cut 4 trillion yen in subsidies by fiscal 2006.

“The government has said the primary budget balance would improve in 10 years, but if it does not change, we will never see a sharp improvement,” said Kenji Yumoto, chief senior economist at Japan Research Institute.

The primary balance — expenditures excluding debt-servicing costs and income excluding bond issues — is a gauge of a government’s fiscal soundness.

The government has said its target is to secure a primary balance surplus soon after 2010. The level of government bonds stands at 36.4 trillion yen for fiscal 2003, almost half the nation’s overall budget.

Economists also worry that budget reform efforts may be sidetracked by political pressure for more spending on economic stimulus packages ahead of the Lower House election expected in November.

“I wonder if we will see a political vacuum later this year,” Dai-Ichi Life’s Kumano said.

Economic and fiscal policy minister Heizo Takenaka said Thursday the government will select priority areas by the end of August to spark private-sector demand with the slightest possible fiscal burden in the next budget.

But the government itself seems well aware of the difficult task it faces.

“We have received a contradictory assessment — that our plan to cut spending is not aggressive enough and the budget will not stimulate the economy. But balancing the two goals is our job,” Takenaka told a news conference Thursday.

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