Business

Growth prioritized over fiscal health in government's draft economic plan

Kyodo

The Japanese government said Tuesday it is preparing fresh fiscal stimulus to ensure that an upcoming tax hike does not stall the economy, a move that has sparked concerns that the country is putting off improving its tattered finances.

According to a draft policy plan submitted by an advisory panel to Prime Minister Shinzo Abe, “extraordinary measures” will be included in the budget for fiscal 2019 and 2020 to offset the effect on domestic demand of an increase in the national 8 percent consumption tax to 10 percent in October 2019.

The measures could include tax breaks on big ticket purchases such as housing and automobiles, as well as daily necessities such as groceries and newspapers.

Education subsidies for children up to five years old will be implemented at the same time as the tax hike, as opposed to the previous schedule where they were spread over a two-year period.

“We will take action in a flexible manner to keep economic swings (caused by the tax hike) to a minimum,” Abe told a meeting of the Council on Economic and Fiscal Policy at his office.

Japan’s economy has been in an expansionary cycle since the prime minister returned to power in late 2012 with his Abenomics policy mix of fiscal spending and monetary easing. Gross domestic product grew for eight straight quarters, the longest streak since the 1980s asset bubble economy, before slightly contracting in the January-March period.

The latest draft plan aims to keep that momentum going by accounting for the effects of the tax hike and a fall in demand after the Tokyo 2020 Olympic and Paralympic Games.

But the emphasis on fiscal measures has increased concerns that the government has put restoring its fiscal health, the worst among advanced economies, on the back burner.

In the draft plan, which is expected to be finalized by the Cabinet in mid-June, the government pushed back its deadline to achieve a surplus in the primary budget balance to fiscal 2025, five years later than previously planned.

A primary budget surplus refers to a situation in which the government can fully cover policy expenditures, excluding debt-servicing costs, with its own tax revenues. Achieving this condition is considered a key indicator of a government’s fiscal health.

The draft plan also removed a cap on increases in social security spending, which is expected to swell as the elderly comprise an increasingly large share of the population.

Such spending, including on pensions and health coverage, will balloon after fiscal 2022, when the postwar baby boomers begin reaching age 75.