Japan looks set to surrender one of its most effective tools for curbing social spending as aging pushes up health, pension and elder care costs.
Key advisers to the Finance Ministry recently dropped a recommendation to cap annual increases in social spending at ¥500 billion, suggesting instead that limits be calibrated with aging costs, without offering details.
They also favored a five-year delay in the government’s target for achieving a surplus in the primary budget balance, a move that won support from advisers to Prime Minister Shinzo Abe this week.
The primary balance surplus is a key indicator of fiscal health, referring to a condition in which the government can fully cover policy expenditures, excluding debt-servicing costs, with its own tax revenues.
With the government’s mid-term economic policy plan to be released later this month, here’s a look at key metrics in Japan’s battle to get its finances in order. They show economic growth has boosted tax receipts and narrowed the deficit, but that government debt is still piling up.
While social spending is the main driver of Japan’s swelling budgets, and public outlays have increased every year since Abe came to power in late 2012, the ¥500 billion cap has been a success. Social spending in the current fiscal year, which started April 1, is projected to rise by the same amount as the cap, to ¥32.97 trillion. Economists including Mizuho Research Institute’s Akihiko Noda are concerned that removal of the cap could see spending accelerate at a time when Japan should be adopting stricter limits.
Getting a surplus in the primary balance, which measures the government’s fiscal position excluding interest payments on its borrowings, has been a key target in tackling Japan’s debt problem. Pushing back the ambitious goal from 2020 to 2025 is another sign that Japan is a long way from getting on top of the debt problem.
To be sure, the economy has grown under Abe, generating higher tax receipts. And this has helped to narrow the deficit since he took office, without resorting to politically painful cuts to social spending. But projections show that taxes alone won’t be enough as Japan’s baby boomers age into their mid 70s in the 2020s.
“Just focusing on revenue, it’ll be impossible in the end,” said Hiroaki Muto, chief economist at Tokai Tokyo Research Center. “Fiscal consolidation is about 70 percent cutting spending and 30 percent increasing revenue. That’s the golden rule.”
Economic advisers to Abe have suggested creating a target to bring the deficit down to 3 percent of gross domestic product or lower by 2021, from about 4.4 percent now. Unlike the primary balance, which sets aside debt service costs, this gauge is affected by interest rates and would have implications for the Bank of Japan.
The central bank’s massive monetary stimulus has saved the government about $45 billion in borrowing costs since BOJ Gov. Haruhiko Kuroda took the helm at the central bank in 2013. If inflation eventually picks up and the BOJ looks to exit its current policy, rates would rise, making it much more costly for the government to service bonds it sells in the future and possibly blowing out the debt-to-GDP ratio. The BOJ could then feel pressure to keep interest rates low to make sure the government’s debt servicing costs are manageable, according to Bloomberg Economics’ Yuki Masujima.
All this points to Japan entrenching itself for the foreseeable future with the heaviest public debt burden of the world’s major economies.
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