After achieving growth of an annualized real 3.9 percent in the first quarter of 2015, the government may argue it is on track to attain its fiscal reform goal through fiscal 2020.
But the plan — which relies heavily on economic growth — could increase the risk of missing the target, as the absence of a target for spending cuts may loosen government efforts to curb expenditure as the population ages and social security expenses swell.
Under the plan approved by the Cabinet on Tuesday, the government aims to reduce the ratio of the primary balance deficit to gross domestic product to around 1 percent in fiscal 2018, to turn the deficit into a surplus by fiscal 2020.
A deficit in the balance means the nation cannot finance government spending other than debt-servicing costs without issuing new bonds.
Japan’s fiscal health is the worst among major industrialized economies, with public debt at more than 200 percent of nominal GDP.
The plan said the government will keep the rise in general policy spending to around ¥1.6 trillion for the next three fiscal years, including about ¥1.5 trillion in social security expenses — a projection based on the experience of the past three years.
But the figures that can be regarded as spending caps are described only as “rough indications” and are not binding targets — an apparent result of compromise between Prime Minister Shinzo Abe’s administration, which focuses on economic growth, and the Finance Ministry, which insists on the need to curb rises in expenditure.
The move also reflects the government’s reluctance to pour cold water on the economy before it raises consumption tax to 10 percent from the current 8 percent in April 2017.
Finance Minister Taro Aso has called the new plan “specific and effective” and opposes setting a cap on social security expenses similar to one introduced in 2006 by the government led by Prime Minister Junichiro Koizumi.
The Koizumi government called for slashing ¥220 billion in social security costs annually, but the initiative was among the factors blamed for the ruling Liberal Democratic Party’s historic defeat in the 2009 election.
“We cannot definitely cap spending when the ratio of the elderly increases,” Aso told a news conference on Friday. “The point is that we will continue to increase ¥500 billion annually as we did in the past three years.”
But economists criticize the plan as overly optimistic, as it is based on realizing robust growth of more than 3 percent in nominal gross domestic product in the medium- to long-term, a level that has not been seen in more than 20 years.
Even with a robust nominal economic growth of more than 3 percent between fiscal 2016 and 2020, Japan would be left with around a ¥9.4 trillion deficit in fiscal 2020, according to projection of the Cabinet Office.
“The plan is a case for typical failure,” said Ryutaro Kono, chief economist at BNP Paribas Securities (Japan) Ltd. “Under a high growth, an expenditure cut and tax increase would be numerically unnecessary. But the growth rate will not rise so easily.”
“The absence of a cap means the plan gives the government an endorsement to lavishly spend until fiscal 2018,” Kono said, calling for such measures as lifting the pension age and increasing the share of medical costs borne by individuals.
To curb spending, the government announced measures such as asking private-sector companies to join public-sector services and the use of cheaper generic drugs, but no numerical targets or estimates derived from such measures were included.
In a sign that the government would be flexible in deciding future expenditure, economic and fiscal policy minister Akira Amari has repeatedly said he is opposed to setting a spending ceiling that would deprive the government of a free hand in fiscal action when needed.
“As for social security and other spending, totally ignoring economic and price developments, that is to say rising prices and wages, would cast doubt over the feasibility of the reform,” Amari told a news conference Tuesday.
Yuichi Kodama, chief economist at Meiji Yasuda Life Insurance Co., said the government has to come up with a fiscal austerity plan when the economy is expanding, as it may need to increase public spending if the economy turns for the worse.
“It is important to aim for a high growth, but developing a plan based on such an optimistic premise must not happen, considering that a failure in fiscal reform is no longer acceptable,” said Kodama.
“The government should come up with a plan that is achievable even under a conservative outlook,” Kodama said, pointing to the need for an expenditure cap in social security expenses similar to the one set by the Koizumi government.