One year ago the government published a five-year budget projection showing how it expected to make ends meet in fiscal 2002-06. Now, the Council on Economic and Fiscal Policy, chaired by Prime Minister Junichiro Koizumi, has revised the plan — downward. The basic picture is that the budget deficit will continue to widen in the five years beginning in fiscal 2003.
According to the updated outlook, tax revenue will not increase dramatically because of anemic economic growth. Deflation is forecast to end, with fingers crossed, in fiscal 2005 or 2006. On the other hand, social security payments, such as those involving health care, pensions and nursing care for the elderly, will rise at an accelerated pace as the population ages. As a result, the annual bond issue will exceed 40 trillion yen beginning in fiscal 2004 — a sum equal to about half of the budget.
The fiscal 2003 budget, now before the Diet, already includes 36.4 trillion yen in new bond sales, far surpassing the 30 trillion yen limit imposed by Mr. Koizumi last year as a showcase of his fiscal reform initiative. That limit is now so far removed from reality that it has no practical meaning. This is seen by the opposition parties, as well as the Liberal Democratic Party’s old guard, as a sign that his deficit reduction plan has all but collapsed.
What is needed is a new benchmark for balancing the budget. The revised blueprint says the “primary balance” will be achieved in the early 2010s, meaning that, aside from bond issues and debt servicing costs, the government will have sufficient revenues to cover expenditures. As a measure of fiscal health, however, this seems too vague. A more specific target should be adopted.
The big question is how to reduce and, better still, close the budget gap. The basic rule, as in household finance, is to control spending in line with revenue. That is easier said than done, of course. But if spending continues to exceed revenue by a wide margin, the deficit will not shrink. Already long-term debt load almost equals the nation’s gross domestic product of 500 trillion yen. Runaway borrowing is an invitation to vicious inflation. To avert national bankruptcy, fiscal discipline must be restored as soon as possible.
Plainly, drastic reform is needed on both the spending and revenue sides. To begin with, the government needs to reaffirm the golden rule of deficit reduction: limiting spending as much as possible while boosting tax revenues. That may sound unrealistic in hard times such as these. But then there is no royal road to a balanced budget.
First, the government needs to cut nonessential expenditures. For example, public investment spending on traditional infrastructure projects, such as building roads and bridges, is no longer an urgent priority. But there are limits to spending cuts. This is particularly true of mandatory spending, such as social security payments. With Japan graying faster than other industrialized nations, there is, indeed, no way to stop the rise in these outlays.
Reform on the revenue side looks more promising. Economic recovery will generate more tax revenue, but counting on it too much is risky given opaque prospects for the economy. Tax increases are unwelcome but seem unavoidable. One prospective option is to increase the consumption tax. In fact, the budget projection includes a scenario in which the tax rate would be raised to 6 percent in fiscal 2004 from the present 5 percent.
The Japan Business Federation has floated a bold plan to increase the rate by 1 percent every year over an extended period of about 10 years. Such a phased increase, it says, is needed to cover rising social security costs. Another proposal says the consumption tax should be defined legally as a purpose-specific tax so that all the revenue can be used exclusively for welfare programs.
Whether the public will accept such a large tax hike is open to question. It seems reasonably clear, however, that a substantial boost in the consumption tax — an indirect tax on goods and services you buy — is necessary to dent the deficit while meeting essential social security needs such as health care, pensions and nursing care.
To secure public acceptance the government as well as political parties need to propose better systems for these public services — systems that can be financially sustained for at least the next three decades. To that end, a national discourse should be started to forge a consensus among people from all walks of life. Under dependable social security systems, people will likely start spending or investing more of their savings.
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