Business / Economy

Midterm fiscal plan targets huge budget deficit

Abe vows to trim ¥17 trillion; details few

Kyodo

The Abe administration approved a medium-term fiscal reform plan Thursday, pledging to narrow the budget deficit by ¥17 trillion over the next two years but offering no specifics on how to improve public finances.

Prime Minister Shinzo Abe’s team also promised to avoid increasing new debt issuance for two years, reduce government waste and allocate money for prior policy measures with an eye on beating nearly two decades of deflation.

“The medium-term fiscal plan shows how we will achieve a fiscal consolidation target, while aiming for a virtuous cycle of economic revitalization and fiscal soundness,” Abe said during a meeting of the Council on Economic and Fiscal Policy.

The plan, however, provides no details of how to cut spending and boost revenue, analysts say, although Japan has been urged by the Group of 20 economies to map out a “credible” medium-term fiscal reform plan before their summit Sept. 5 and 6 in St. Petersburg, Russia.

Fears are growing that the newly crafted plan, which is not premised on raising the consumption tax, may not be considered “credible” at the G-20 summit and the administration’s seriousness about restoring fiscal health could be called into question in the international arena.

“I believe we can prove our eagerness to balance our budget” at the G-20 summit by explaining the medium-term plan, Finance Minister Taro Aso told a news conference.

Abe’s Cabinet plans to revisit the fiscal plan and formally endorse it in the autumn, following a final judgment on whether to go ahead with the tax hike next April.

Raising the consumption tax is regarded by some international economic organizations as key to Japan’s fiscal rehabilitation. The administration said in the plan that it will decide whether to implement the hike next April as legislated while “comprehensively taking economic conditions into consideration.” The plan as it now stands is to raise the tax to 8 percent from the current 5 percent next spring and then to 10 percent in 2015.

On the spending front, the plan class for slashing the combined deficit for both the central and local governments — which is likely to total around ¥34 trillion in fiscal 2013 — to about ¥17 trillion in fiscal 2015. The reduction is required for Abe’s Cabinet to attain its goal of halving the ratio of the primary balance deficit to gross domestic product by fiscal 2015 from the fiscal 2010 level.

A deficit in the balance means the country can’t finance government spending other than debt-servicing costs without issuing new bonds. An improvement in the balance is viewed as the critical first fiscal reconstruction step.

The Abe administration has also pledged to turn the primary balance into a surplus by fiscal 2020, but the latest government estimate, also released Thursday, indicates this can’t be accomplished even if the consumption tax hikes are carried out and the economy gets on a firm growth path.

Under an optimistic scenario in which the economy would expand by an average of 3.0 percent in nominal terms over the next decade from fiscal 2013, the primary revenue deficit would be 2.0 percent in fiscal 2020, the Cabinet Office said.

The projection suggests that Abe’s government should make more of an effort to put the fiscal house in order by taking measures such as drastic cuts in social security payments and further tax hikes.

Fiscal consolidation is one of the significant challenges Abe is facing, as the world’s third-largest economy has been recovering on the back of his “Abenomics” stimulus. Japan’s fiscal health is the worst among major developed economies, with public debt at more than 200 percent of GDP.

If concern intensifies over the nation’s fiscal discipline, it could prompt investors to let go of Japanese government bonds and trigger a surge in long-term interest rates that would drag down domestic demand with mortgage rates and corporate borrowing costs increasing, some analysts said.

The government on Thursday also approved its guidelines for the compilation of the budget for fiscal 2014, which will start next April 1. The Abe administration asked all ministries and agencies to cut spending for public works projects by 10 percent from the previous fiscal year, while setting special reserves in the budget to promote its growth strategy.

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