A key government panel outlined a plan to overhaul of government spending and taxes aimed at restoring the country to fiscal health, but did not provide specifics on the size of expected budget cuts or consumption tax increases.
In the interim report on the reform of revenues and expenditures, the Council on Economic and Fiscal Policy urged the government to work toward a primary surplus — annual tax revenues minus outlays other than debt-servicing costs — by fiscal 2011.
The panel, chaired by Prime Minister Junichiro Koizumi, said it will try to put the level of debt as a share of gross domestic product on a steady downward trend by the mid-2010s.
According to a panel estimate, the government would have to cut spending by 15 percent to 20 percent, or 15 trillion yen to 20 trillion yen, to generate a primary surplus by fiscal 2011 without raising taxes.
To achieve a primary surplus of 2 percent of GDP by fiscal 2015 absent tax increases, it would need to ax spending by about 30 percent, or 30 trillion yen to 35 trillion yen.
Such huge spending cuts are unrealistic, says the estimate, which means the government will have to raise the consumption tax from the current 5 percent.
The projections are based on a nominal annual growth rate of 3 percent and an average long-term interest rate of 4 percent over the five years starting in fiscal 2007.
The panel is expected to come up with a detailed review of taxes and spending by June.
But it is likely to face a battle putting a detailed fiscal blueprint together. Bureaucrats are expected to resist drastic spending cuts. And any sharp rise in the consumption tax is certain to draw fire from the public.
Panel members also remain divided over the outlook for economic growth and long-term interest rates, forcing them to present four different economic scenarios, each of which would affect the size of tax increases or spending cuts needed to balance the budget.
The outline says the government should aim to minimize the burden on taxpayers by streamlining the government. It recommends spending cuts in all sectors. Special budgetary accounts and independent administrative agencies are also targeted.
The outline argues the government should not use revenues from higher taxes to expand the public sector, but should instead “return” it to the public.
The meaning of this word varies, depending on which panel member is speaking. Private-sector members say higher revenues from consumption tax hikes should be used solely to finance the welfare system, while politicians prefer to treat them as a general increase in budget resources.