The government approved a key economic policy outline Friday that includes pushing back the goal of achieving a primary balance surplus by five years to fiscal 2025 on the back of its own optimistic economic growth prediction.
The move could further fuel concerns over the long-term fiscal soundness of the already debt-ridden national coffers. The primary balance — considered a key barometer of fiscal health — refers to a government’s ability to meet government expenditures, excluding interest payments.
“We will keep checking to make sure we hit our fiscal goals,” said economic and fiscal policy minister Toshimitsu Motegi at a news conference on Friday. “In terms of restraining spending, we are looking to set concrete goals by the end of the year.”
The outline — compiled by the Council on Economic and Fiscal Policy, chaired by Prime Minister Shinzo Abe — also laid out plans to create a new visa status for nonprofessional migrant workers from overseas, a potential turning point for Japan’s historically strict immigration policy. Abe is reportedly considering plans to accept as many as 500,000 foreign workers in total by 2025. The new visa system will apply to the construction, agriculture, nursing, hotel and ship-building industries.
The council’s annual report compiles dozens of key economic policy measures. This year the report reconfirmed the policy of raising the consumption tax from 8 percent to 10 percent on Oct. 1, 2019, as scheduled.
Meanwhile, the government also pledged to take “extraordinary measures” to increase spending for fiscal 2019 and 2020 to balance out the expected surge and fall in demand before and after the planned tax hike.
These measures may include tax breaks for big-ticket purchases by consumers, such as those of autos and homes. Meanwhile, free education for pre-elementary school children will also begin when the tax hike kicks in, according to the outline.
The influential council relies on input from government ministries and the private sector to set short- and medium-term fiscal goals in order to guide government policy.
In the nearer term, authorities are aiming to bring down the primary budget balance from a deficit of 3.4 percent of GDP in 2017 to a deficit of 1.5 percent by 2021.
In addition to fiscal targets, the government also put forth a range of policies designed to lift overall economic growth rates, many of which focus on encouraging the further expansion of elderly people and women in the workforce. A notable omission from the policy outline was a reference to the government’s past commitment to restrain increases in social security spending by ¥500 billion a year, further highlighting the continued prioritization of economic growth over fiscal consolidation, a hallmark of the over half-decade of government stimulus known as Abenomics.
“The new fiscal consolidation plan gives utmost priority to the economy. This is possible because interest rates are still low for the time being,” said Keiji Kanda, senior economist at Daiwa Institute of Research Ltd.
Kanda, however, warned that placing an emphasis on economic growth rather than fiscal consolidation may be a luxury not available for future governments.
“The short-term risk to the market and interest rates is limited (by pushing back the fiscal goals), but the longer you put off fiscal consolidation and grow your stock of debt, even a small interest rate rise could threaten debt sustainability,” Kanda said.
Japan is already one of the most indebted nations in the world, with a general government gross debt-to-GDP ratio of 253 percent, far higher than countries that have struggled to finance debt, such as Italy at 133 percent. Germany — the often cited model of fiscal health — has a gross debt to GDP ratio of only 66 percent.
But Japanese policymakers have avoided cutting back on spending for the time being, as an overwhelming amount of debt is still financed domestically, alongside the fact that the government still possesses a large stash of foreign exchange reserves and other assets, making the country’s net debt-to-GDP ratio of 131 percent slightly more manageable.
In order to bring down the level of the debt-to-GDP ratio, the government appears to be banking on faster economic expansion, rather than rely on cuts to spending.
However, even if foreign labor and other market reforms aimed at improving productivity are achieved, some economists believe that the growth rates laid out in the government plan — 3 percent nominal and 2 percent real growth — are overly ambitious.
“I think hitting the goal of fiscal consolidation by 2025 will be a bit difficult,” said Motohiro Sato, professor at the Graduate School of Economics of Hitotsubashi University in Tokyo.
“The plans are based on overly optimistic growth rates, so the feasibility of the consolidation targets is questionable,” said Sato, who serves on an advisory committee to the Abe-led council.
While those concerned with Japan’s debt sustainability often point to Greece and other Southern European nations as cautionary tales of profligate government spending, many in Tokyo have taken a different lesson from Europe’s debt problems — cutting spending back in one fell swoop can lead to economic malaise.
“Simply achieving a primary balance doesn’t mean you have healthy government finances,” said Toshihiro Nagahama, an economist at Dai-ichi Life Research Institute Inc.
Nagahama pointed to Italy as an example of a country that has achieved persistent primary balances, while still failing to bring down overall levels of government debt. This scenario is possible because the country has experienced stagnant economic conditions, and thus little to no improvement in its debt-to-GDP ratio.
“We are moving towards fiscal consolidation even though it has been delayed,” said Nagahama. “I think the government has balanced economic considerations with financial health.”
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