The government is expecting a bigger than predicted primary deficit of ¥6.5 trillion ($55.6 billion) in fiscal 2020, reflecting the effects of a planned exemption of food items from a sales tax hike, Cabinet Office estimates showed Thursday.
The latest estimates show Japan needs to make more effort to reach its goal of achieving a primary surplus by fiscal 2020, even if tax revenues are expected to grow on the back of an economic recovery led by expanding corporate profits.
The deficit is projected to widen as the government has not come up with ways to make up for smaller potential tax revenues after deciding to exempt food items from the planned consumption tax increase to 10 percent in April next year from the current 8 percent.
In July last year, the government estimated a primary deficit of ¥6.2 trillion in fiscal 2020. A deficit in the primary balance means the government cannot finance its annual budget, excluding debt-servicing costs, without issuing new bonds.
The lower potential tax revenue, due to the exemption of food items from the sales tax hike, is likely to be around ¥1 trillion annually. The government plans to offset the shortfall with some ¥400 billion of savings gained by forgoing some social security spending. But it has yet to come up with ways to make up for the remaining ¥600 billion.
The estimates were presented at a meeting of the Council on Economic and Fiscal Policy headed by Prime Minister Shinzo Abe.
At the meeting, members with business and academic backgrounds proposed that the government use an increase in tax revenues to fund policy measures such as supporting child-rearing and nursing care, key policies of the prime minister.
“I would like (the panel) to discuss how to utilize the achievement of Abenomics,” Abe said, referring to the tax revenue increase he says was brought by his economic policy mix. He also ordered that the outcomes of the council’s discussions be reflected in the government’s economic and fiscal blueprint to be compiled in June.
But increasing state expenditure could run counter to Japan’s efforts to pursue fiscal consolidation.
Japan’s fiscal health is the worst among major industrialized economies, with public debt at more than 200 percent of nominal gross domestic product due mainly to swelling social security costs amid an aging population.
The latest estimates were based on an “economic revival scenario,” under which Japan will achieve economic growth of more than 3 percent in nominal terms from fiscal 2018.
Under a more conservative, or “baseline,” scenario, in which nominal economic growth is estimated to mostly remain under 2 percent, the government projects the primary budget deficit would reach ¥12.4 trillion in fiscal 2020.