With the passing of the deadline for budgetary requests from government ministries and agencies, work to compile the fiscal 2007 budget is now in full swing. The new budget is important because it will be the first under the government’s program calling for spending cuts of 11.4 trillion yen to 14.3 trillion yen over the next five years in order to achieve a primary budget surplus by fiscal 2011. When the primary balance is achieved, policy outlays will be financed solely by tax revenues and not on the issuance of bonds.

The fiscal 2007 general account budget is expected to reach 82.73 trillion yen, an increase of 3.04 trillion yen or 3.8 percent from the initial budget for fiscal 2006. The increase is due to an expected rise in the long-term interest rate from last year’s 2.7 percent to 2.9 percent, which will push up the debt-servicing costs by 1.93 trillion yen to 20.69 trillion yen. Grants to local governments are expected to total 15.23 trillion yen, an increase of 4.6 percent.

The budgetary ceiling adopted by the Cabinet in July sets the total of policy-related outlays at 46.81 trillion yen, up 0.9 percent from the initial fiscal 2006 budget. The spending-cut program calls for a 1.6 trillion yen cut in social welfare, an annual 1 percent to 3 percent cut in public works and an annual 2 percent to 4 percent cut in official development assistance over five years.

Under this framework, the fiscal 2007 budgetary ceiling, for example, stipulates a 3-percent cut in ODA and a 1-percent cut in the defense budget. But some budgetary requests have exceeded the prescribed amounts, reflecting the intentions of politicians from the ruling coalition who want to beef up spending in the countryside in order to win in next year’s Upper House election.

The government must try to contain the budget size under the overall ceiling and cleverly allocate money so that the nation can accomplish both healthy economic growth and social stability.

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