DPJ administration's first budget

After some drama and confusion, including a screening unit’s slashing of budgetary requests before public eyes and tough demands by Democratic Party of Japan Secretary General Ichiro Ozawa, the Hatoyama administration has compiled the fiscal 2010 budget, its first budget since its inauguration in mid-September.

Harsh financial conditions have prevented the administration from keeping all the promises that the DPJ made during its campaign last summer. But the administration has succeeded, to some extent, in realizing the party’s slogan of “shifting weight to people from concrete” and its aim of providing more funds for households, rather than for industry-linked organizations and large-scale public works projects.

The budget includes the monthly child allowance of ¥13,000 per child (no income cap on household eligibility), funds to make high schools tuition free, an increase of 300 in the quota of teachers at public primary and middle schools — the first increase in seven years — and a slight increase of 0.19 percent in remuneration for medical institutions — the first increase in 10 years.

The child allowance is significant because it embodies the idea that society as a whole must support child-rearing. The increase in payments to medical institutions is part of a fund of some ¥400 billion allocated to core hospitals in rural regions. It is expected to help halt the deterioration of medical services there.

Fund shortages have forced the administration to give up its campaign promise of reducing the rates of gasoline and other road-related taxes. This decision has secured tax revenues of ¥1.7 trillion for the central government and ¥800 billion for local governments. In the end it will be conducive to the fight against global warming and to environmental protection.

Despite these positive points, though, the budget’s basis is shaky in that the government has to run a large deficit.

While the fiscal 2010 budget’s general account reached the largest-ever at ¥92.299 trillion, and general expenditures to pay for policy measures amounted to ¥53.454 trillion, also an all-time high, the economic downturn is expected to reduce tax revenues to ¥37.39 trillion — down 18.9 percent from the initial fiscal 2009 budget and the lowest level since fiscal 1984.

The government will have to issue bonds of ¥44.30 trillion, an increase of 33.1 percent and an all-time high. On an initial budget basis, new bond issuance will exceed tax revenues for the first time in the postwar years.

Bloated deficit spending and bond issuance without discipline could cause long-term interest rates to rise and have a devastating impact on people’s lives. The combined long-term outstanding debt of the central and local governments is likely to reach ¥862 trillion (some ¥6.75 million per Japanese) at the end of fiscal 2010, or 1.81 times Japan’s gross domestic product.

On the other hand, there is concern that the budget, despite its huge size, may not adequately stimulate the economy. The total budget for fiscal 2009, with two supplementary budgets, amounted to more than ¥102 trillion. The fiscal 2010 budget is about ¥10 trillion less, while total demand in the economy is estimated at ¥35 trillion less than total supply.

Following the DPJ’s policy line, social welfare spending has been increased by 9.8 percent to ¥27.268 trillion, or 51 percent of general expenditures. This is the first time that the social welfare budget has topped 50 percent of general expenditures. The spending includes the fund for livelihood assistance, which increased by 6.9 percent to ¥2.209 trillion, reflecting an increase in the number of people who need to be on welfare.

In contrast, total spending for public works projects fell by 18.3 percent to ¥5.773 trillion — a record drop that symbolizes the DPJ’s philosophy of shifting money to people from spending on public works projects. Eighty-nine dam projects will likely be frozen. Although grants in aid to the local governments rose by ¥1.073 trillion to ¥16.893 trillion, the fall in public works spending will likely weaken local economies.

The budget allocates ¥561.8 billion for income compensation for rice farmers — a main DPJ campaign promise.

The ¥4.790 trillion defense budget has dipped for eight consecutive years now. As the government plans to postpone until May 2010 a decision on where to relocate the U.S. Marine Corps’ Futenma Air Station on Okinawa Island, it allocated ¥5.3 billion for the relocation, or ¥4.1 billion less than the previous year. It allocated ¥120.8 billion to build a 19,500-ton, 248-meter-long vessel carrying 14 helicopters. Regrettably, virtually no public discussions were held on the role of this vessel.

Since the DPJ’s campaign promises, including plans to double the child allowance in fiscal 2011, will need a lot of money, the government must rigorously prune wasteful projects. At the same time, it should pinpoint areas where investment will be concentrated to increase employment and improve the quality of people’s lives.