The fiscal 2009 draft budget unveiled Saturday isn’t likely to help Japan recover because the recession will probably accelerate the ongoing decline in tax revenues, economists warn.

While some say more spending is what is needed to stimulate the economy, others are suggesting the government should reconstruct its finances and embark on structural reforms to spur growth.

Finance Minister Shoichi Nakagawa stressed the budget would prevent the economy from worsening.

“This budget will stop this economy, financial markets, employment and other things from deteriorating, and we are compiling this budget with the hope or goal that Japan will be the first economy to go up in the world,” Nakagawa told reporters.

“The budget will be historic because it halts this (deterioration) and turns (the economy) back up again while Japan is suffering from an impact seen only once every hundred years,” he added.

Economists remain skeptical.

“It is not clear whether it is really intended to improve the economy or perhaps with some consciousness of the impending election,” said Hideo Kumano, chief economist at Dai-Ichi Life Research Institute. The terms of the Lower House lawmakers will expire in September, even if Prime Minister Taro Aso dissolves the chamber and calls a snap election.

Government spending will jump to an all-time high of ¥88.55 trillion under the proposed budget. But the scale is deceptive, Kumano said.

“The scale of fiscal expenditures got big simply because social security-related costs got bigger,” Kumano said. “Although the scale is big, its ability to influence the economy is small.”

Katsuhiro Oshima, an economist at Mitsubishi Research Institute, said that a big portion of the budget is going to be used merely to finance the government’s basic pension scheme.

“The scale (of total spending) is certainly small,” Oshima said, referring to the portion that will actually be useful in stimulating the economy. “It is not the scale that is changing the tide of the economy.”

The government on Friday slashed its economic forecast for fiscal 2009 to zero growth in terms of real gross domestic product, and said it expected the economy to contract 0.8 percent for the whole of 2008 ending in March.

The draft budget said it expects to collect ¥46.1 trillion in tax revenue in 2009, down ¥7.5 trillion from the previous year. The ministry thus plans to issue ¥33.3 trillion in new bonds, up sharply up from ¥25.3 trillion.

While Nakagawa stressed that the government has not changed its goal of achieving a primary budget surplus in fiscal 2011, economists view it as an impossible target.

“It is impossible since the tax revenue is worsening,” Kumano said. “We cannot foresee what is going to be.”

Oshima concurred, forecasting low economic growth for the next two years and lower government revenues.

Some fear that the precarious state of Japan’s finances may soon begin to affect the people.

“If the fiscal condition worsens too much, the credibility of government bonds will be questioned,” said Keisuke Naito, senior economist at Mizuho Research Institute.

Long-term interest rates might jump, cutting off credit to businesses and people, Naito warned.

If the government reverts to its nonreformist ways and resorts to tons of public works projects, Oshima said interest rates will likely climb, affecting consumers.

Given the recession, Naito said the government is being forced to focus on recovery tactics for now.

Experts, however, are stressing that fiscal reconstruction and structural reform must be carried out.

Regarding spending, Kumano suggested that the government should strictly select projects that will stimulate the economy.

“Toward the future, (the government) should not lower the flag of fiscal reconstruction,” Naito said, urging the government to rebuild the framework for fiscal reconstruction at the earliest available date to slash the snowballing fiscal deficit.

To increase growth, Oshima proposed the government embark on reforms that follow former Prime Minister Junichiro Koizumi’s postal privatization plan.

“When people think the economic outlook is better, or the economy is going to be stabilized, consumption will surge,” Oshima said.

Reforms should be hammered out so that the corporate drive for investments in plant and equipment will also accelerate and economic growth will rise, he said.

“Without doing so, tax revenues will not rise,” Oshima said.

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