The government has approved a crucial part of an economic policy plan that will serve as a basis for the compilation of the fiscal 2007 budget, following an agreement struck between the government and the ruling coalition of the Liberal Democratic Party and New Komeito.
Approved by the Council on Economic and Fiscal Policy chaired by Prime Minister Junichiro Koizumi, the plan is aimed at fixing the nation’s debt-ridden finances. But it fails to establish a clear-cut, singular numerical goal for reducing the nation’s spending.
Instead, latitude has been built into the goal so that politicians from the ruling parties could move to hamper realization of the plan’s intended effect if they fear that public dissatisfaction with spending cuts will work to their disadvantage ahead of next year’s Upper House election.
If no spending-reduction measures are taken in the next five years, a revenue shortfall of 16.5 trillion yen is expected for fiscal 2011, a time by which the government had hoped to see primary budgetary surpluses at the national and local levels. (A primary budgetary balance implies equilibrium between revenue excluding borrowed money and expenditures excluding debt service.) The estimates assume that Japan’s economy will nominally grow 3 percent a year.
The spending reduction plan will be incorporated into the policy guideline for economic and financial management and structural reform, scheduled to be officially adopted at the Cabinet meeting on July 7.
The plan calls for spending cuts of 11.4 trillion yen to 14.3 trillion yen in five years, down slightly from the government’s original proposal of 11.5 trillion yen to 14.5 trillion yen. LDP Upper House members, apparently wishing to maintain footholds in their respective constituencies, applied political pressure to get the proposal altered. Their complaints about the amount of spending cuts for local governments resulted in the government and the ruling coalition settling on the final figure.
In compiling the fiscal 2007 budget, the government intends to maintain its policy of reducing the issuance of government bonds to less than 30 trillion yen, as in the fiscal 2006 budget.
Even if spending reductions are carried out in strict accordance with the plan, a shortfall of 2.2 trillion yen to 5.1 trillion yen looms. The plan does not say how this shortage is supposed to be covered. If the shortage is to be financed solely by a consumption tax increase, the current 5 percent tax rate will have to be raised by 1 to 2 percentage points.
After the plan was approved, Mr. Koizumi said spending cuts as well as tax increases are necessary to reconstruct the nation’s finances and to revitalize the economy. If the ruling coalition, fearful of a bad public reaction, chooses to avoid mentioning possible tax hikes, a primary budgetary balance is less likely to be achieved in 2011, much less a surplus.
The original proposal envisaged continuing to reduce spending on public works by 3 percent annually from the previous year’s level, as has been done so far under the Koizumi administration. But to lessen the impact of public works cuts in the countryside, the final version of the plan aims for an annual reduction of 1 to 3 percent, or 3.9 trillion yen to 5.6 trillion yen.
Another political device included in the plan is aimed at appeasing politicians who want to prevent local economies from sinking. While calling for the lowering of public works spending shouldered solely by local governments, the plan also says that a flexible approach should be taken toward reductions with sufficient attention paid to economic activities and conditions in local communities.
Under the plan, at both central and local government levels, social security spending will be cut by 1.6 trillion yen; personnel costs for civil servants, by 2.6 trillion yen; and spending in other fields, including official development assistance, by 3.3 trillion yen to 4.5 trillion yen.
Since national economic and social conditions change from year to year, the plan calls for a yearly review of spending reductions. Otherwise, reduction-spending goals, if followed mechanically even when the Japanese economy deviated from predictions, might lead to hardships for those affected by social security cuts, plus other problems.
Nonetheless, policymakers and politicians should not use the review clause as an excuse to become lax about spending. They must do their best to seek ways to strengthen the economy and maximize the welfare of the people with the limited financial means available.
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