Cabinet OKs record-high ¥97.71 trillion 2018 budget to cover rising social security and defense costs

Costs for graying society, North Korea nuclear threat push up amount for sixth year running

by Alex Martin

Staff Writer

The Cabinet of Prime Minister Shinzo Abe on Friday approved a draft budget of ¥97.7 trillion for fiscal 2018 — setting a new record for the sixth straight year.

The government aims to strike a balance between reviving the economy and restoring fiscal health, underscored by its reductions in new bond issuances on the back of a sizable tax revenue.

But swelling social security costs and rising military spending in response to North Korea’s nuclear and missile threat suggests that improving its deficit-ridden finances — the worst among major industrialized countries — still has a way to go.

The draft general account budget marks an increase from this year’s ¥97.5 trillion. The government also approved an extra budget of ¥2.9 trillion for the current year, its smallest since Abe returned to power in 2012.

“I believe we were able to draft a budget that addresses economic recovery and fiscal soundness,” said Chief Cabinet Secretary Yoshihide Suga following the budget’s approval.

Moderate economic expansion is expected to boost tax income to ¥59.1 trillion, the highest since 1991 when the economy was in high gear prior to the burst of the asset price bubble.

The hefty tax revenue also allows for restricting new bond issuances to ¥33.7 trillion, down from ¥34.4 trillion planned this year. That will bring down the bond-reliance ratio — the percentage represented by proceeds from new bond issuances in the projected total revenue — to 34.5 percent. That’s the lowest since 2007, a year before the collapse of the Lehman Brothers triggered the global financial crisis. It compares to 35.3 percent in fiscal 2017.

“The new budget gives the impression that the government’s stance toward fiscal reconstruction has strengthened somewhat,” said Hideki Matsumura, senior economist at the Japan Research Institute.

The supplementary budget approved for this year could be an indication, Matsumura said. The figure, which includes spending on missile defense, building of nursery schools and subsidies to small and midsize companies, was notably smaller than others drafted in recent years. “If the size of next year’s extra budget is along these lines in terms of size, it could pave the path toward fiscal consolidation,” Matsumura said.

Social welfare costs remain the biggest item, and are projected to grow by around ¥500 billion to ¥32.9 trillion, or 33.7 percent of the entire budget, as the graying population pushes up related fees.

The figure, however, was in line with the government’s aim to limit the annual increase in age-related social security expenses to ¥1.5 trillion in three years through fiscal 2018. To curb spending the government reviewed drug prices, bringing them down 1.4 percent to shave off ¥145 billion, but at the same time increased nursing care benefits to improve the compensation of welfare workers.

Military spending also reached a record high ¥5.2 trillion as the nation works to update its defense posture amid heightened tension on the Korean Peninsula.

With debts amounting to over ¥1.1 quadrillion, around twice the gross domestic product, Japan is the most debt-laden among the world’s advanced economies.

To ease its reliance on debt the government has set a 2020 target of turning the primary budget balance into a surplus., meaning the government can cover all its expenditures (excluding debt-servicing costs) with tax revenues.

But Abe has said meeting the deadline is looking difficult. In January, the Cabinet Office estimated the deficit will be around ¥8.3 trillion in 2020.

For 2018, the government projects the primary balance deficit to stand at ¥10.4 trillion, down ¥400 billion from 2017. The government plans to reveal a new goal in its economic and fiscal policy guidelines to be presented in June.

Takuya Hoshino, economist at Dai-ichi Life Research Institute, said the draft budget may reflect how pressure to spend more on welfare may have eased somewhat compared to the late 2000s when the baby boomers began receiving their pensions en masse.

But he warned that the government needs to establish a stable economic foothold before second-generation baby boomers begin graying in the 2030s.

About 27 percent of Japanese are aged over 65, with the figure expected to grow as deaths outpace births and the ratio of workers to non-workers falls, burdening the younger generation.

“Now is the time to really work on fiscal health,” Hoshino said. “But that doesn’t mean just focusing on achieving a primary balance surplus. The nation needs to fundamentally address the demographic issue we are facing and come up with measures that could alleviate the problem,” he said.