The fiscal 2007 draft budget, the first one compiled under the administration of Prime Minister Shinzo Abe, reduces the amount of new debt, lifting hopes for the nation’s financial reconstruction. But the reduction is mainly due to lucky circumstances — not because of strenuous efforts to cut spending. The government must continue striving to reduce the issuance of government bonds in coming years.

The general account of 82.9 trillion yen represents a 4 percent increase from the initial budget for fiscal 2006. But the government was able to reduce the amount of government bond issuance by 4.54 trillion yen to 25.43 trillion yen. The record reduction fulfills a goal of Mr. Abe. Thus new bond issues will account for 30.7 percent of the general account, down from 37.6 percent in fiscal 2006. Still, the government must continue to rely on a large amount of bond debt to compile a budget.

The government also managed to reduce the deficit in the primary balance — tax revenues plus revenues from other sources (excluding bond issues) minus expenditures (except debt-service costs). The deficit stands at 4.43 trillion yen, down from the 11.21 trillion yen deficit in the initial fiscal 2006 budget.

The government has set a goal of generating a surplus in the primary balance for both the central and local governments in fiscal 2011. If things go well, it may be possible to achieve that goal ahead of schedule. But this means slowing the increase in outstanding debt. The amount of government bonds outstanding at the end of fiscal 2007 is forecast to reach 547 trillion yen, an increase of about 10 trillion yen from the end of fiscal 2006.

Outstanding debt at both the national and local levels will be enormous. At the end of fiscal 2007, long-term outstanding loans owed by the central and local governments are expected to total 773 trillion yen — 1.48 times the nation’s gross domestic product — up from the 767 trillion yen projected at the end of fiscal 2006.

The reduction in bond issuances and in the primary balance deficit is made possible by a surge in tax revenues to an estimated 53.46 trillion yen — 7.58 trillion yen higher than in the initial fiscal 2006 budget. Good performances by enterprises under the continuing economic recovery enabled revenue from corporate taxes to grow. Abolition of breaks on income and residential taxes increased tax revenues by about 1 trillion yen. But whether the current economic expansion will continue is not certain. Sluggish consumer spending has forced the government to revise growth projections for fiscal 2006, which ends next March, from the earlier 2.1 percent in real terms to 1.9 percent. Real economic growth for fiscal 2007 is forecast to be 2 percent. If the economy slows down due to sluggish personal spending, it will be difficult to count on more tax revenue.

A closer look at the budget shows that the government has yet to show rigor in tightening its belt. General expenditures or policy-related spending increased by 1.3 percent from the initial fiscal 2006 budget to 46.97 trillion yen. This represents the first increase in three years. Spending for social welfare, which accounts for slightly less than half of policy-related spending, increased by 2.7 percent to 21.13 trillion yen, while spending for public works spending decreased by 3.5 percent to 6.94 trillion yen.

Given the acceleration of the graying of the nation’s population, an increase in spending for social welfare is inevitable. The government needs to present a convincing plan to fund the higher outlays. Since such a plan may call for raising the consumption tax rate, it will be all the more important to avoid wasteful use of tax money.

While the government reduced tax burdens on the corporate sector by allowing firms to write off all capital investment, and kept the maximum income tax rate for high-income people at the current level, it cut allowances for mother-and-child families receiving livelihood protection assistance. Such an approach could widen a schism in society and give the impression that the government does not care about the socially weak.

Soon after this draft budget was announced, Mr. Masaaki Honma, head of the Tax Commission, resigned over a scandal only 1 1/2 months after his appointment to the post. He reportedly lived with a girlfriend in a plushy housing unit for ranking public servants, whose rent is much cheaper than similar condominiums in the private sector. Mr. Honma was pushing a tax policy favorable to the corporate sector and his appointment was strongly sought by Mr. Abe. His disgraceful resignation from this important tax-related post has apparently damaged public confidence in Mr. Abe’s leadership.

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