Prime Minister Taro Aso’s Cabinet endorsed budget guidelines Tuesday that will not cut automatic growth in social security spending in fiscal 2010.

The decision not to trim the annual increase marks a departure from the policy initiated in 2006 by then Prime Minister Junichiro Koizumi, who spearheaded economic reforms that until now have been upheld by his successors.

At a news conference in the evening, Finance Minister Kaoru Yosano indicated the government may pay for the spending increase by issuing government debt.

The natural growth in social security spending factors in annual rises in various economic indicators, such as inflation and the increasing number of pension recipients.

Under the plan, ¥220 billion was to be cut every year until fiscal 2011.

Had that curb not been introduced, social security outlays would have risen by ¥870 billion in fiscal 2009, the Finance Ministry said.

Economists called the latest move a ploy by the Liberal Democratic Party-New Komeito ruling bloc to garner public support ahead of the next Lower House election, which must be held by fall.

They also voiced concern that the loosened fiscal discipline will have a negative impact on daily life, lower economic growth, and lead to tax increases and higher long-term interest rates.

LDP General Council Chairman Takashi Sasagawa quoted Finance Minister Kaoru Yosano as saying in a memorandum to party executives on Monday that he will accept the growth in social security costs in the fiscal 2010 budget.

“In short, there will not be any cut of ¥220 billion,” Sasagawa said.

Under the new guidelines, when ministries get their budgetary request ceilings for fiscal 2010, possibly next month, they will no longer be bound by curbs on the annual increase in social security outlays.

The government will now aim to achieve a surplus in the primary balance at the national and local levels in 10 years, instead of by fiscal 2011 as stipulated by Koizumi in 2006.

The government will aim to at least halve the ratio of the primary balance deficit to GDP in less than five years. The guidelines also stipulate that the government should work to stabilize the ratio of national and local government debt to GDP midway into the next decade and start reducing it in the early 2020s.

“It’s like saying farewell to Koizumi, Koizumi reforms,” said Yasunari Ueno, chief market economist at Mizuho Securities Co. “The political situation ahead of the general election is strongly reflected” in the fiscal guidelines.

“The talks are going toward loosening fiscal discipline. Although this is positive for the present economic situation, it will be extremely negative if you look at the future.”

The loose fiscal policy will probably lead to tax hikes and lower economic growth, and will drive corporations overseas, Ueno warned, saying the government is increasing spending while disregarding those future disadvantages.

Hiroshi Hanada, economist at Sumitomo Trust & Banking Co., doubted whether the new goal to achieve a primary budget surplus is realistic.

“The claim to achieve a (primary) surplus in 10 years will not be convincing unless cutting other expenditures is considered,” while social security spending is maintained, he said.

Hanada also stressed his concern that the ballooning fiscal deficit may drive long-term interest rates higher and damage the economy.

“Since rising interest rates cause more companies to go bankrupt, there will be various negative effects both directly and indirectly,” he said.

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