The government's top economic panel pledged Monday to keep recommending cuts in fiscal spending, including public works, despite the crushing losses the ruling coalition took in rural areas during the Upper House election.

While discussing spending caps for the fiscal 2008 budget, private-sector members of the Council on Economic and Fiscal Policy suggested cutting public works outlays by 3 percent from the previous year. The rest of the panel supported the number.

At a news conference after the session, Economic and Fiscal Policy Minister Hiroko Ota, who chairs the panel, said the 3 percent target is the council's conclusion.

"The economic recovery trend has not changed. We are making efforts to cut spending just like last year," she said.

Another target recommended to the prime minister was to curb social security costs by ¥220 billion and the personnel costs of the central and local governments by ¥500 billion.

Prime Minister Shinzo Abe has pledged to stick to the austere, small-government policy of his predecessor, Junichiro Koizumi.

The council also downplayed its earlier assertion that prices would rise for the first time in a decade, citing stagnant growth in wages as a major reason.

According to the government's latest forecast, the gross domestic product deflator, which reflects general price movements, will be unchanged for fiscal 2007. In January it forecast a rise of 0.2 percent.

The government said GDP is expected to grow 2.1 percent both in nominal and real terms. In January, the government said it expected GDP to expand 2.2 percent in nominal terms in fiscal 2007, which ends March 31, 2008.

For the year to March 2009, the government predicted that GDP would rise to 2.6 percent in nominal terms and to 2.2 percent in real terms.

This forecast is expected to become the basis for starting discussions on the fiscal 2008 budget.

Index still shows boom

The key gauge of the current state of the economy as above the boom-or-bust threshold of 50 percent for the third consecutive month in June, the government said Monday.

The index of coincident economic indicators came to 77.8 percent, supported by strong production-related indicators, the Cabinet Office said in a preliminary report.

The index of leading indicators, which predicts economic developments about six months down the road, stood at 80.0 percent in June, topping the 50 percent line for the first time in 12 months, led by positive readings in indicators of the equity and commodity markets.

A reading above 50 percent is considered a sign of economic expansion and a figure below that line is seen as a sign of contraction.

The government left unchanged its view of the current economic situation for the second month, saying the economy is "improving recently," instead of "seesawing," as used in April, according to a Cabinet Office official.

Of the 11 economic indicators comprising the coincident index for June, nine were available for the preliminary report. Of these, seven items, including industrial production, shipment and retail sales, showed positive readings.

The index for industrial goods shipments hit a record high, while that for sales by small and midsize firms reached its highest figure in the current cycle of economic expansion that began in February 2002.

The official said the index for industrial output has improved significantly and manufacturers expect production to increase in the coming months.