Business | ANALYSIS

Japan drags feet on cutting deficit as pre-tax hike budget tops ¥100 trillion

by Ryotaro Nakamaru

Kyodo

The government’s budget for fiscal 2019 makes abundantly clear where Prime Minister Shinzo Abe’s priorities lie when it comes to the economy.

The spending plan, which received Cabinet approval on Friday and is now headed to the Diet in January, shows government outlays rise above ¥100 trillion ($900 billion) in an initial budget for the first time, pushed over the threshold by ¥2 trillion in funding for measures to lessen the shock of raising the consumption tax in October.

The colossal sum is a testament to Abe’s desire to prevent the tax hike from putting the brakes on the economy by triggering a plunge in domestic demand, as happened after the previous increase in 2014.

But it also means Japan makes little progress in shedding its unwelcome status of having the worst fiscal health among major industrialized countries.

Abe has promised to achieve fiscal consolidation by bringing the primary balance — tax revenue minus expenses other than debt-servicing costs — into the black by the target year of fiscal 2025.

Under the latest budget for the year beginning in April, the primary deficit is set to shrink from ¥10.4 trillion this fiscal year to ¥9.2 trillion.

This will be made possible by tax revenue climbing to a record high for the first time since fiscal 1990, before the bursting of the asset bubble, lowering the government’s issuance of new bonds.

But the government continues to rely on debt to fund about a third of the budget. By its own reckoning, without an improvement in cash flow it will run a primary deficit of at least ¥2.4 trillion in fiscal 2025, a figure that could fall further into the red after official growth estimates were downgraded this month.

The ¥2 trillion tranche of the budget covers a slew of measures including free pre-elementary education, a rebate program for purchases made by cashless methods such as credit cards or smartphones, and spending on public works to improve resilience against natural disasters.

“We’ve taken sufficient steps to overcome the economic impact of the consumption tax increase,” Finance Minister Taro Aso said on Friday.

But skeptics say the measures have been orchestrated to win favor among voters for Abe’s Liberal Democratic Party ahead of Upper House and local elections next year.

The Abe administration is “using the tax hike to purposely stoke fear among the public and acting as if it is coming to the rescue with these measures,” said Takahide Kiuchi, executive economist at the Nomura Research Institute and a former board member at the Bank of Japan. “Next year’s elections are clearly in consideration here.”

The nation’s prospects for achieving fiscal health could worsen in fiscal 2020 given that the government has already announced plans to ramp up spending on public works and take additional steps to mitigate the impact of the tax increase.

The hike was intended to increase tax revenue to help cover social security costs that are swelling along with the number of elderly in the country. But Kiuchi said that if future budgets continue to grow in a similar fashion to the fiscal 2019 budget, this could negate the increase in tax revenue.

“What were initially meant to be one-off measures could be extended if the government deems it necessary, for example, to underpin the economy after the 2020 Tokyo Olympics. It could just keep giving reasons to increase spending.”

With defense spending also climbing as Japan steps up purchases of state-of-the-art stealth fighters and seeks the deployment of aircraft carriers, fiscal consolidation increasingly seems to be lower on Abe’s agenda.

This may be because with his final term as LDP chief, and therefore prime minister, set to end in 2021, the politically thorny task will fall on his successor.

Social security costs took up more than a third of the total budget, a record-high ¥34.06 trillion, as a rapidly aging population pushed up spending on health care and pensions.

Among the outlays, spending on public works projects including the disaster-proofing of infrastructure will come to ¥6.91 trillion, a 15.6 percent jump from the previous year. An additional ¥556.6 billion will be used for official development assistance in foreign countries.

Along with the fiscal 2019 initial budget, the Abe administration plans to seek approval by the Diet for a second supplementary budget for fiscal 2018 worth ¥3.04 trillion. More than a third of the extra budget will also go toward disaster-proofing measures.

The rest will be used for other miscellaneous purposes such as shoring up the agricultural sector in view of the entries into force of the 11-member Tokyo-led Comprehensive and Progressive Agreement for Trans-Pacific Partnership free trade agreement on Dec. 30 and a trade pact with the European Union in February.