The fiscal 2008 draft budget unveiled Thursday by the Finance Ministry has prompted many economists to wonder whether the government's fiscal reconstruction goal will ever be achieved.

Under the proposed budget, government spending will increase 0.2 percent to ¥83.06 trillion, marking the second straight yearly rise. The government, however, managed to limit new bond issuances to ¥25.35 trillion, slightly down from the current year's ¥25.43 trillion.

"The proposal demonstrates the government's desire to achieve fiscal reconstruction (through cutting new bond issuances), but the pace is very slow," said Shinichiro Kobayashi, a senior economist at Mitsubishi UFJ Research and Consulting Co. "The outlook for fiscal reconstruction is becoming uncertain."

Economists say the proposed budget bristles with signs that Prime Minister Yasuo Fukuda's government caved in to pressure from the ruling coalition ahead of a possible general election sometime next year.

To cite one example, the government is increasing tax grants and other subsidies to local governments by 4.6 percent next fiscal year to help financially battered rural areas.

Although the government will trim its public works spending by 3.1 percent, the cut is much smaller than those achieved by Fukuda's predecessors.

The administration of his immediate predecessor, Shinzo Abe, managed a 3.5 percent year-on-year cut, while before him Junichiro Koizumi's administration achieved year-on-year cuts of 3.5 percent to 10.7 percent.

"After the (ruling bloc's) defeat in the Upper House election (in July), the government realized it needed to assist rural areas and the elderly," said Hideo Kumano, chief economist at Dai-ichi Life Research Institute in Tokyo.

But of greater concern to economists is the long-term outlook for the government's fiscal condition.

Outstanding public debts are expected to reach ¥776 trillion, or 147 percent of gross domestic product, by March 2009, the worst showing among industrialized countries.

The primary deficit will also widen for the first time in five years, swelling to ¥5.18 trillion from this fiscal year's ¥4.43 trillion.

Not without reason, some worry that Japan will fail to reach its self-imposed goal of achieving a primary balance by fiscal 2011. The government has pledged to achieve the goal through spending cuts despite swelling social security and other costs associated with the rapidly aging population.

"The government will fail to achieve a primary balance by 2011 even if the consumption tax is raised," Kobayashi said.

Japan's economy may also slow down in the face of a global economic slump, which, if it happens, could lead to a sharp rise in the yen's value and thus erode the income earned from the country's exports, he added.

"If the U.S. enters a recession, Japan's longest postwar economic expansion will come to an end. We have to see how the Christmas shopping season goes in the U.S. as an indicator of whether the housing woes are spreading to consumers. Such data, to be released in January, signal what will happen in the U.S. economy next year," Kobayashi said.

Due in part to strict housing regulations introduced in June, the government Wednesday cut Japan's growth forecast for the year to March to 1.3 percent from 2.1 percent and said the economy will grow 2 percent next year, shaving 0.1 point off its August forecast.

"Under a looming sign of economic slowdown, tax revenues are also likely to decline. So a primary balance can only be achieved in fiscal 2013 if the government increases the consumption tax in 2010 and the economy begins to pick up," he predicted.

Takahide Kiuchi, chief economist at Nomura Securities Co., concurred. In his research report, he wrote, "To maintain fiscal reform, the government needs to drastically reform the social security system and increase tax revenues."