The Kan administration has endorsed a general account budget that is a record-high ¥92.41 trillion for fiscal 2011 — the second budget to be formed under the Democratic Party of Japan government. The budget includes several measures that show the characteristics of the DPJ’s policy orientation. But Prime Minister Naoto Kan failed to give a clear direction in prioritizing the DPJ’s election pledges under severe financial constraints. A big problem is that the government has to heavily rely on the issuance of a large amount of bonds and has no prospect that it can stop the practice in the near future.

The general account budget endorsed on Dec. 24 is 0.1 percent larger than the previous high of ¥92.30 trillion for the fiscal 2010 initial budget under the Hatoyama administration. For two consecutive years, bond issuance will be larger than tax revenues — ¥44.29 trillion vs. ¥40.92 trillion.

The debt servicing cost will increase 4.4 percent to ¥21.54 trillion. Grants from the general account to local governments will drop 4 percent to ¥16.78 trillion. The actual amount they will receive will rise 2.8 percent to ¥17.37 trillion, with money from special account budgets added. Local government can freely use ¥512 billion given in grants with no strings attached. This partially fulfills the DPJ’s promise to abolish subsidies with strings attached from the central government.

The general expenditure to finance core policies will increase 1.2 percent to ¥54.07 trillion. Social welfare spending will increase 5.3 percent to ¥28.70 trillion, accounting for 53 percent of the general expenditure. As part of it, the monthly child allowance will go up from the current ¥13,000 to ¥20,000 for children aged under three.

¥3.6 trillion will be spent to pay for the DPJ’s main election promises, up from the ¥3 trillion in fiscal 2010. ¥2.2 trillion will be spent for the child allowance and ¥800 billion will be spent for income compensation for individual farmers. The latter measure will cover not only rice farmers but also wheat farmers. Farmers who have enlarged their farms will also get the money. ¥400 billion will be used to make high school tuition free and ¥120 billion will be used to make some parts of expressways free.

Other budgetary items will include making permanent from November 2011 a system that gives ¥100,000 every month to unemployed people who take vocational training after their unemployment insurance benefits has expired; improving a system in which housewives with a license to work at child daycare facilities can take care of children at their residences; capping the expressway tolls at ¥2,000 on weekdays and at ¥1,000 on Saturdays, Sundays and national holidays; and extending the eco-point system for home renovation to the end of 2011. (The eco-point system for electronic appliances will end at the end of March 2011.) The government will also spend ¥208.5 billion to reduce the size of classes for first graders from the current 40 pupils to 35 pupils.

The fiscal 2011 budget will increase the central government’s outstanding debt to ¥668 trillion at the end of the fiscal year or at the end of March 2012. If the debt of local governments is added, Japan’s outstanding debt could expand to 184 percent of gross domestic product. It is clear that the government cannot keep its word on each election promise. Thus, it is all the more important to prioritize policy measures and find stable revenue sources.

The Kan administration could not find stable funds needed to increase the portion of basic pension benefits shouldered by the central government from one-third of the benefits to one-half, although this is an important social welfare measure for aged people. Instead, it had to rely on surplus funds from special account budgets, which are not permanent funds.

To pay for an increase in the child allowance, the government decided to abolish the basic deduction on taxable income of highly paid salaried workers, scrap deductions for dependents (except spouses) on taxable income for some people and raise the inheritance tax. But this is not the result of the Cabinet giving a clear direction. This happened because the government, fearing loss of support from housewives in the coming local elections, backed away from the DPJ’s election promise of abolishing the deduction for spouses on taxable income as a permanent revenue source to pay for the child allowance.

The Kan administration also failed to show a clear direction concerning what it will do with social welfare spending, which will automatically increase by ¥1 trillion every year. It must show people two options — (1) increase the financial burden to maintain benefits at the current level or to increase them or (2) not increase the financial burden, which will lead to the lowering of benefits due to an increase in the population of aged people. The government must clearly state that if people want improved benefits, they should accept higher taxes or social insurance premiums. It should be ready to present a concrete proposal on this matter as soon as possible.

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