The Cabinet on Sunday approved a 82.91 trillion yen budget for fiscal 2007 that could help the government achieve the so-called primary balance — a key benchmark of fiscal soundness — earlier than its target of 2011, but experts say policy steps planned for next year will leave the ballooning social security bill unaddressed.
The government has probably delivered on Prime Minister Shinzo Abe’s advertised commitment to rehabilitate the debt-ridden fiscal state through a sharp cut in new bond sales — a reduction of 4.54 trillion yen, the largest on record, from 29.97 trillion yen originally planned for 2006. New government bonds are used to secure funds to offset revenue shortfalls.
However, experts say the Abe administration has a long way to go before it gets the snowballing debt under control as well as meeting the massive social security bill amid expensive medical services and pensions to support the aging population.
Also, this fiscal consolidation, despite being touted by the administration, is mainly due to higher tax revenues from companies generating record profits on the back of the longest postwar economic expansion.
Tax revenues for fiscal 2007 are expected to reach 53.47 trillion yen, the highest in nine years. This is not thanks to Abe’s fiscal plan, experts say.
“Much of Japan’s fiscal improvement was due to cyclical factors. It means that the benefits of soaring tax collections may only be temporary,” Standard & Poor’s credit analyst Takahira Ogawa wrote in a report. “Thus, Japan’s long-term fiscal sustainability will depend on structural reform of the government’s revenues and expenditure.”
Finance Minister Koji Omi said Wednesday that the government could reach its self-imposed goal of balancing the budget excluding debt payments earlier than the 2011 target thanks to the soaring tax receipts.
Of course, this will be reassuring for Abe as he commits to cutting the world’s largest public debt. But it means mixed blessings for the public, which is facing an end to certain tax breaks.
The temporary tax break on income will be abolished in January and one on the residential tax in June. On top of that, national pension premiums will be raised by 240 yen per month starting in April and the amount regular employees pay for pension insurance will be raised beginning in September, for example by 354 yen if you earn 200,000 yen a month.
Moreover, the Finance Ministry is expected to press next year for a hike in the consumption tax, which now stands at 5 percent, in a bid to meet the rising social security bill.
Critics say this will be a blow to consumers tightening their belts because soaring corporate profits have not yet translated into better pay.
Overall, Abe made efforts to reduce spending across the board, following in the footsteps of Prime Minister Junichiro Koizumi. Spending on conventional public works has been slashed by 3.5 percent, while defense funding has been lowered by 0.3 percent. Assistance to developing countries has been trimmed by 4 percent.
However, he failed to cut total spending. The aging population has swollen the social security bill to 21.14 trillion yen, up 2.8 percent due to growing expenses for medical services and pensions. Social security eats up nearly half of general expenditures.
General expenditures will reach 46.98 trillion yen, up 1.3 percent from the initial 46.37 trillion yen in the year to March 2007 and the first increase in three years.
How to deal with social security spending will be particularly tricky — and sensitive because of the aging population — for Abe, whose popularity has declined because of his ambiguous stance on political and economic policies.
The National Institute of Population and Social Security Research released on Wednesday a projection that two in five people in Japan will be at least 65 years old in 2055.
Snowballing social security costs are “unavoidable,” said Hideo Kumano, chief economist at Dai-ichi Life Research Institute Inc. “We don’t have any concrete answer for how Japan will trim spending on such costs structurally. If we curtail this spending, health-care quality may deteriorate.”
Finance Minister Omi agrees. He said at a news conference after the Cabinet approved the draft: “Although Japan could eliminate the national deficit earlier than the 2011 target, we need to carry on with drastic fiscal reform including the consumption tax amid the graying population and declining birthrate as well as increasing the government’s contribution to basic pension plans.”
With such mandatory spending looming, a solution must be found.
Naoyuki Yoshino, an economics professor at Keio University in Tokyo, has a simple solution for curbing spending on health care.
“The government as soon as possible needs to create an open market where baby boomers (who were born between 1947 and 1949) and seniors can freely look for a job and apply for it, just like those fresh out of college,” Yoshino said, arguing that they can maintain their heath by working even after they retire.
The baby boom rush to retirement starts in 2007.
He said that many Japanese seniors love to work and it gives them motivation in life. “Japanese in their 70s physically feel that they are still in their 50s, due to their healthy diet,” Yoshino said.
Cut in investments
The Cabinet on Sunday endorsed a 5.6 percent cut in the government’s fiscal investment and loan program in fiscal 2007.
It will be the eighth straight yearly reduction and will hit the lowest level in 30 years, reflecting continued efforts to make the program more efficient and market-oriented.
The outlays under FILP, or “zaito,” for the next fiscal year will total 14.162 trillion yen, down from 15.004 trillion yen under the initial fiscal 2006 plan.
It is the smallest FILP budget since fiscal 1977, when the scale was 12.538 trillion yen.
The fiscal 2007 figure is about one-third of the peak level in fiscal 1996, when the amount under the initial plan stood at 40.533 trillion yen.
FILP, mostly financed by postal savings and public pension funds, involves long-term projects such as road construction. It supports small and midsize firms as well as home buyers. The number of entities to be financed in fiscal 2007 is 38.
The program was once dubbed the “second budget” due to its gigantic size. It came under fire for inefficiency and waste, and rules on mandatory deposit of postal savings and public pension funds with the Finance Ministry’s Trust Fund Bureau were scrapped in April 2001.
To alleviate the impact of the change, the government introduced a seven-year transition through fiscal 2007 under which FILP bonds are partly bought by postal savings and public pension funds. After that, sales of the bonds will depend completely on market principles.
To pay for the 2007 program, the Finance Ministry plans to issue 18.60 trillion yen worth of FILP bonds, compared with 27.20 trillion yen under the initial fiscal 2006 plan.
In a time of both misinformation and too much information, quality journalism is more crucial than ever.
By subscribing, you can help us get the story right.