The government’s draft budget for fiscal 2014, which Prime Minister Shinzo Abe’s Cabinet approved Tuesday, reflects a lack of serious efforts to cut public spending and reduce government debt at a time when the tax burden on consumers is set to increase.
Tax revenue is expected to reach the highest level in seven years with the 3-percentage point consumption tax hike in April and higher corporate tax income amid improved business earnings.
Still, ballooning government spending will result in an increase in the amount of outstanding government bonds by ¥29 trillion at yearend. Social security expenditures for the aging population will top ¥30 trillion for the first time, and public works spending will also increase from the current fiscal year. Defense spending will rise 2.8 percent for the second annual increase in a row.
Japan’s public debt-to-GDP ratio is the worst among industrialized economies. The increased burden on taxpayers through the consumption tax hike needs to be matched by maximum efforts on the part of the government to cut spending. Yet policy expenditures in the fiscal 2014 budget — including spending for public works projects and social security programs (excluding debt-servicing costs) — reached a record ¥72.61 trillion, up ¥2.2 trillion from the initial budget for the current fiscal year. The estimated ¥6.9 trillion rise in tax revenue — including ¥4.5 trillion from the consumption tax hike — will let the government trim the issuance of new government bonds by ¥1.6 trillion to ¥41.25 trillion.
The deficit in the country’s primary balance — annual tax and nontax revenue minus outlays other than debt-servicing costs — is estimated to shrink by ¥5.2 trillion to ¥18 trillion.
Still, new bond issuance will cover 43 percent of the state’s revenue, and outstanding government bonds are forecast to total ¥780 trillion at the end of March 2015 — equivalent to more than 15 years’ worth of fiscal 2014 tax revenue. Therefore, the situation does not warrant a relaxation of fiscal discipline.
The Abe administration has relied heavily on fiscal stimulus, including public works spending, to support the nascent economic recovery. But given the government’s fiscal health, the reliance on large-scale spending packages cannot go on indefinitely. The public sector-driven upturn in the first year of the administration needs to be taken over by robust private-sector demand.
The budget and the tax schemes for the next fiscal year feature tax cuts and other benefits for businesses, in the apparent hope that better environment for the companies will result in higher wages for their workers, setting in motion a self-sustained cycle of increased consumer spending and corporate investments. But the effects of such policies depend on the companies. Meanwhile, the budget offers little in terms of direct support for households, which will bear the brunt of the consumption tax hike.
The Abe administration says the fiscal 2014 budget aims to end the nation’s prolonged period of deflation and to restore the government’s fiscal health. But the estimated improvement in the fiscal situation relies greatly on the consumption tax hike, which is forecast to hurt consumer spending and overall economic growth early next fiscal year. The government needs to shoulder a greater share of the burden by slashing its own expenditures.
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