Prime Minister Shinzo Abe’s priorities in his economic policies are clear and consistent — no fiscal rehabilitation without economic revival. In prioritizing economic growth and busting deflation over fiscal reconstruction, Abe has twice postponed the consumption tax hike to 10 percent through October 2019 but remains confident of achieving the government’s goal of eliminating the primary balance deficit by fiscal 2020.
The problem is, his own government’s estimate shows that Japan, even after growing at a robust pace never seen in the past two decades and finally raising the consumption tax in 2019, would still be short of the deficit target by ¥5.5 trillion. Under a scenario of slower growth that’s closer to the nation’s growth potential, the deficit of national and local governments combined would top ¥9 trillion, according to the latest Cabinet Office estimate.
With the nation’s fiscal health already the worst among major industrialized economies — and public debt at roughly double gross domestic product, the internationally proclaimed goal of a primary balance surplus by 2020 — which means the government will be able to finance its annual budget (excluding debt-servicing costs) without incurring new debt — will be of crucial importance for the credibility of Japan’s commitment to putting its fiscal house in order. Instead of just selling rosy high-growth scenarios, the Abe administration should present a concrete and credible road map for fiscal rehabilitation, which might entail politically tough cuts to expenditures, including some social welfare benefits, as well as increases in the public burden in terms of tax and social security premiums.
One source of Abe’s confidence in his priorities is the government’s rising tax revenue under his watch — which appears to support his argument that increased tax revenue from economic growth (the “fruits of Abenomics”) will rebuild the nation’s fiscal health. The tax income of the national government indeed rose from ¥43.9 trillion in fiscal 2012 to ¥47 trillion in 2013, ¥54 trillion in 2014 and ¥56.3 trillion in 2015 — the highest in 24 years. His administration estimates that tax revenue will rise to ¥57.6 trillion in fiscal 2016, while the government will still rely on debt to pay for 36 percent of the annual expenses. Part of the revenue increase comes from higher income and corporate taxes due to wage gains, shareholder dividends and improved corporate earnings. It is also attributable to the 2014 consumption tax hike from 5 percent to 8 percent — without which it’s calculated that the fiscal 2015 tax revenue would have fallen to around ¥50 trillion.
The question is whether the upward trajectory will continue. Tax revenue in fiscal 2015 fell short of the government’s forecast — by ¥140 billion — for the first time in seven years. Due to slowdowns in business earnings attributed to the yen’s rise, corporate tax revenue fell ¥200 billion from the previous year for the first year-on-year decline in six years — and fell short of the government’s forecast by ¥900 billion. With the prospect of corporate earnings clouded by the yen’s strength, there’s no guarantee fiscal 2016 revenue will match the government’s estimate.
The Cabinet Office’s biannual forecast released last month estimates the primary balance deficit in fiscal 2018 at ¥10.5 trillion, or about 1.9 percent of GDP. The deficit estimate increased by ¥1.3 trillion from the previous forecast in January — reflecting Abe’s decision in June to delay the consumption tax hike to 10 percent from April 2017 to October 2019.
The 2020 estimate of a ¥5.5 trillion deficit improved by ¥1 trillion from the January forecast by counting on the effects of planned spending cuts. But that assumes Japan’s economy will grow by at least 2 percent in real terms and 3 percent in nominal terms annually. Since Abe returned to the helm of the government, the nation’s GDP grew 2.0 percent in real terms in fiscal 2013, shrank 0.9 percent in 2014 and grew 0.8 percent in 2015. The GDP’s nominal growth has never reached 3 percent in the past 20 years. This suggests that the government will need to achieve more than faster growth to eliminate the deficit by 2020.
In its annual review of Japan’s economy released this month, the International Monetary Fund said the target of a primary budget balance by 2020 — along with the Abe administration’s economic growth and inflation targets — “remain out of reach under current policies” and called for a “significant policy upgrade” of Abenomics. The IMF’s forecast of 0.3 percent real-term growth in Japan’s GDP in 2016 and 0.1 percent growth in 2017 — to be followed by sluggish growth close to its growth potential, believed to be roughly 0.5 percent, over the medium and longer term, highlights the optimistic tone of the administration’s 2 percent real-term growth scenario. The administration should not need the prodding by the IMF to reassess the credibility of its fiscal consolidation road map.
In a time of both misinformation and too much information, quality journalism is more crucial than ever.
By subscribing, you can help us get the story right.