Prime Minister Shinzo Abe might like to portray the government’s general account budget for fiscal 2016, approved by his Cabinet this week, as proof that his policies are working both to achieve economic growth and restore the nation’s fiscal health. The ¥96.72 trillion annual budget — the biggest ever — assumes an increase in tax revenue to the highest level in 25 years, thanks to improved corporate earnings, and issuance of new government bonds will be kept to the lowest in eight years.
However, the restraint on increases in social security expenses and public works spending in fiscal 2016 comes on the heels of lavish spending to be paid for in the supplementary budget for fiscal 2015, including those that appear aimed at securing voter support for the ruling coalition in the upcoming Upper House election. The two budget packages together appear to represent insufficient efforts by the Abe administration to streamline government spending in the face of mounting public debt. Defense spending meanwhile will be increased for the fourth year in a row and will exceed ¥5 trillion for the first time in fiscal 2016.
Policy-related expenditures, not including debt-servicing costs, will hit a record ¥73.11 trillion in fiscal 2016, with social security expenses such as medical and nursing care costs — growing rapidly amid the rapid aging of Japan’s population — reaching ¥31.97 trillion, or more than 40 percent of such spending.
The government, which expects the economy to grow 3.1 percent in nominal terms in the year to March 2017 — a level that has never been achieved over the past two decades, is counting on tax revenue in fiscal 2016 to increase from the estimated ¥56.4 trillion in the current year to ¥57.6 trillion, the largest since fiscal 1991 — when the nation was still basking in the effects of the asset-inflated bubble boom of the late 1980s. Annual tax revenue will have increased by more than ¥13 trillion since Abe returned to the government’s helm in late 2012.
As a result, the issue of new government bonds in the next fiscal year will be kept to ¥34.43 trillion, the lowest in eight years, with the debts paying for 35.6 percent of the general-account expenditures — the lowest ratio since before the 2008 collapse of Lehman Brothers triggered the global recession, but still way higher than many other advanced economies. Members of Abe’s Cabinet and LDP leaders touted the budget as a showcase of Abenomics’ success in both reviving the economy and fiscal rehabilitation.
It’s questionable, however, whether the Abe administration is doing enough to trim expenditures. This summer, the administration came up with a road map to achieve the government’s goal of eliminating the primary balance deficit — a condition in which taxes and other sources of revenue excluding debts cover policy-related expenses — by fiscal 2020. That required the government, for example, to keep increases in social security expenditures to no more than ¥1.5 trillion over the three years beginning in 2016.
The fiscal 2016 budget kept the increase in social security spending to ¥441 billion over the current year by cutting back on the level of fees paid to medical institutions, slashing the amount from the ¥670 billion sought by the Health, Labor and Welfare Ministry, clearing the hurdle set in the road map to keep the annual increase within ¥500 billion. But the restraint belies the fact that the supplementary budget for fiscal 2015, compiled almost simultaneously as the annual 2016 budget, features roughly ¥800 billion in social welfare spending, including a total of ¥360 billion in special allowances for low-income pensioners.
The government has explained that the measure — which will distribute ¥30,000 to such pensioners starting next spring — is aimed at supporting people who would not benefit from wage increases being pushed for by the administration. It’s not clear why the support has to be extended through the one-time allowance, intended to reach the people just ahead of the Upper House election, instead of the regular framework of the social security programs. Featuring such lavish expenses in the extra budget while restraining expenditures in the annual budget seems to undermine the fiscal discipline to which the administration itself has committed.
The same scrutiny should be made of public works spending. The fiscal 2016 budget calls for ¥5.97 trillion in public works expenditures, or roughly the same level as in the current year. But combined with the nearly ¥600 billion earmarked in the supplementary budget, government spending on public works projects effectively represents a sharp increase.
The administration may want to say that the ¥3.3 trillion extra budget, which it hopes to clear the Diet early next year ahead of the fiscal 2016 budget, will not harm the fiscal health since its cost will be covered by surplus tax revenue and funds carried over from the previous year. But the administration should think again if it can afford those measures — whose urgency appears questionable — at a time when outstanding public debt continues to mount, albeit more slowly, and is estimated to reach ¥1.062 quadrillion at the end of fiscal 2016 for the national and local governments combined.
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