The government has unveiled a new economic pack
age designed to pep up the frail economy and give further impetus to structural economic reforms going into the 21st century. Titled “Economic Rebirth Measures,” the package, which was announced last Thursday, focuses on building social infrastructure, such as electronic-communications networks, helping cash-strapped small businesses and startup ventures, and creating jobs.
The new program is worth 18 trillion yen. However, the official growth target for fiscal 1999 has been revised upward only slightly, from 0.5 percent to 0.6 percent, indicating that the government still harbors doubts about economic prospects.
Now in the works is a second supplementary budget, which will reach the Diet floor late this month. To foot the extra bill, the government will issue another 7 trillion yen worth of IOUs, raising the ratio of debt dependency — new bond issues as a percentage of general-account revenue — to a record 40 percent or more.
Defending the new package, Finance Minister Kiichi Miyazawa said the economy now needs “a final push.” The implication is that the latest set of economic measures is probably the last in the series of stimulus packages put together by the government in recent years. In fact, the fiscal crunch virtually rules out further large-scale measures. The new package comes on top of a 17.9 trillion yen program (excluding tax cuts) that took effect about a year ago. Clearly, such generous spending is reaching its limit.
The public debt is already approaching crisis proportions, guaranteeing that the burden will be shifted largely to future generations. It is only natural that economists and thoughtful business people are sounding the alarm about the consequences of fiscal profligacy.
The government scenario for economic rebirth goes like this: First, the spending package would lay the groundwork for lasting recovery in fiscal 1999. Then private demand would begin to provide the main thrust of growth in the latter half of fiscal 2000. Finally, from fiscal 2001, the economy would enter a new period of sustained growth led by robust private demand.
There are already signs of recovery. Gross domestic product continued to expand for the first two quarters of this year, January through June. The index of “coincident” economic indicators, a measure of the present state of the economy, exceeded the boom-bust line of 50 percent from July through September. More and more private economists are coming around to the view that the economy hit bottom last spring.
But the Economic Planning Agency, maintaining its caution, has yet to make a “bottoming-out” announcement. This is because the recovery signs reflect in large part the effect of policy measures; consumer spending remains weak due to layoffs and other corporate restructurings; and business spending on new machinery and equipment continues to stagnate. In addition, the EPA apparently sees the yen’s rise, fueled by expectations of an economic upturn here, as a drag on recovery. All this helps to explains why the growth target has been raised only marginally. The king-size stimulus package is meant partly to win votes in the next general election, which will be held within a year. Among the “sweeteners” are an additional 10 trillion yen in special loan guarantees for small businesses and a one-year extension of the ad hoc guarantee arrangement, as well as an easing of the personal financial burden of the nursing-care insurance program for the elderly, which will start next April.
In particular, extra funding for nursing-care services was included in the package apparently without much thought of the issue. The ruling parties, it seems, put their electoral interests before the long-term implications of this disputed program. Now, however, the issue has become a political time bomb that could demolish the fledgling coalition even before the election.
Behind the controversy is a basic disagreement between the two main coalition partners, the Liberal Democratic Party and the Liberal Party, over ways of financing the costly program. While the LDP envisages revenue from premiums as the chief source of funding, the LP would prefer some kind of welfare tax, possibly an updated version of the consumption tax.
One positive feature of the economic package is future-oriented funding for social infrastructure, including Internet systems. These “millennium” projects, many of which set specific targets and completion dates, are welcome, in part because, unlike the elderly-care program, they show clearly how and when the government intends to achieve its policy objectives.
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