Business | ANALYSIS

Japan's draft budget a firm move against fiscal headwinds

by Atsushi Kodera

Staff Writer

The record ¥96.7 trillion draft budget for fiscal 2016 is by many measures a feat, a key push in the government’s efforts to cut spending.

But amid snowballing welfare costs straining already tattered finances, Japan is nowhere near the clear in its bid for fiscal health, economists say.

The Cabinet on Thursday approved a draft general account budget that is ¥380 billion larger than the initial budget for the current fiscal year, itself the largest yet.

“This is a budget that addresses important issues facing Japan,” Chief Cabinet Secretary Yoshihide Suga said following the budget’s approval.

Suga said the draft budget is designed to address a range of concerns, including providing more child-rearing support, enhancing nursing care services for the elderly, lightening the cost of education and kick-starting efforts to spur local economies.  He said the budget will help advance policy under a slogan beloved of Prime Minister Shinzo Abe — that all citizens can be able to play an active role.

Indeed, economists praised in particular efforts to restrict new bond issuances at ¥34.4 trillion, bringing down the bond-reliance ratio, or the percentage represented by proceeds from new bond issuances in the projected total revenue, to 35.6 percent.

Social welfare costs are projected to grow by some ¥500 billion, in line with a fiscal rehabilitation plan worked out in June that calls for restraining social welfare spending at ¥1.5 trillion in three years from 2016.

Social welfare costs, which are growing as the nation’s population ages, are the biggest-spending item at ¥32 trillion, representing 33.1 percent of total spending.

“I think the government did a good job in significantly restraining new bond issuances,” said Keio University professor Takero Doi. “I think they also have made a degree of achievement in restraining social welfare costs, for the first year of the fiscal rehabilitation period until 2020.”

Toshihiro Ihori, professor at the National Graduate Institute for Policy Studies, also acknowledged a degree of success in restraining spending, although he expressed caveats.

“I can see the efforts they put in while facing various restraints,” he said. “In any case, the severe situation of the government’s finances has not changed.”

With debts amounting to some ¥1,000 trillion, about twice the gross domestic product, Japan’s finances rank among the worst of the advanced economies.

The aging population is sapping the nation’s economic strength amid a decline in the working population. Meanwhile, the retired population continues to swell, compounding the problem.

“The fiscal 2016 budget would grow some ¥400 billion from the current fiscal year and become the largest in history, as they say, but not only that, you have to watch out for extra budgets,” Ihori said, pointing to the risk of loosening fiscal discipline.

Ihori pointed to the ¥3.32 trillion extra budget for the current fiscal year that was approved Dec. 18. It features allocations for finance measures to bolster economic competitiveness, anticipating a loosening of trade after the Trans-Pacific Partnership agreement, as well as reinforcement of counter-terrorism measures.

Ihori takes a particularly dim view of another allocation of ¥360 million for the one-time payment of ¥30,000 to low-income pensioners, a program that faced opposition even among members of the ruling Liberal Democratic Party.

“It’s only a ploy to make older voters happy,” ahead of the Upper House election next summer, he said.

“Economic recovery this year has boosted tax revenues and the government has extra money . . . but if the government finances are in tatters, why not use it to pay back debts,” Ihori said.

“When you add the initial budgeted amount for the current fiscal year (to the extra budget), you’re now spending nearly ¥100 trillion,” he said.

“Around this time next year, the consumption tax hike is only months away,” he said, referring to a move planned for April 2017. “As the tax will rise to 10 percent from 8 percent, the government could draft an extra budget in anticipation of additional tax revenue from that,” thereby boosting spending.

Economists also warn the real GDP growth rate projection of 1.7 percent that forms the basis of tax revenues for the draft budget may be overly optimistic, creating a risk that less lower economic activity may result in disappointing tax revenues.

“The government has to make utmost efforts to ensure its finances will improve and its economic growth strategy will achieve the expected results,” Keio University’s Doi said.

“They should remind themselves that if they fail to achieve the planned tax revenue they then should draft an extra budget to cut spending.”