Just as the government’s work to compile the fiscal 2017 budget gets into full swing, the Abe administration is reportedly planning to put together a third extra budget for the current year, featuring hundreds of billions of yen in additional spending, including for upgrades to the missile defense system. The administration’s basic policy, adopted this week, for next year’s budget calls for a “thorough review of all expenditures without sanctuary.” But under Prime Minister Shinzo Abe’s watch, supplementary budgets compiled one after another on the grounds of providing economic stimulus have become constant loopholes that allow more government spending.
Since Abe returned to power in 2012, his administration has relied on a series of supplementary budgets. As a result, the size of the annual budget — while kept in the range of ¥90 trillion to ¥96 trillion in the initial stage — has expanded every year to around ¥100 trillion as a result of the extra spending. The level of expenditures boosted in response to economic crises and major disasters have not come down to previous levels even after the problems have been addressed. To make good on the nation’s pledge for fiscal rehabilitation, a mechanism should be considered to prevent the government from easily resorting to extra budgets except in response to severe economic shocks or major natural disasters.
The government’s fiscal 2017 budget policy emphasizes the role of fiscal spending, along with the Bank of Japan’s massive monetary stimulus, to shore up the economy. Toward the end of the year, the Finance Ministry plans to scrutinize the budgetary requests filed by ministries and agencies. However, it appears inevitable that the size of the general account budget for the year starting next April will hit a record ¥97 trillion, due mainly to the continuing expansion of social welfare expenses.
Since fiscal 2013, the Abe administration has managed to reduce issuance of new government bonds each year, as the rising tax revenue under his economic policy covered the spending increases. Given the prospect that a significant rise in tax revenue may no longer be expected due to the fall in corporate tax revenue triggered by the yen’s upturn this year, however, there is concern that fiscal 2017 might see the first rise in fresh bond issuance since 2010.
Abe, who advocated aggressive fiscal spending as one of the “three arrows” of his Abenomics, has stressed that the repeated extra spending will not harm the nation’s fiscal health because they don’t rely on fresh debt and instead are covered by the increased tax revenue under his watch. Given the decline in corporate profits due to the yen’s rise, however, it is uncertain whether the government can secure the planned tax revenue this year. Abe had to issue ¥2.75 trillion in new bonds to compile his second extra budget for the year.
The prime minister announced his plan to compile that extra budget in June to finance another stimulus package, saying the world economy is “facing a major risk.” The stimulus featured large-scale public works projects apparently geared to the Upper House election in June. Despite his concern, the nation’s economy grew an annualized 2.2 percent in the July-September period for the third quarter of growth in a row mainly on brisk exports to Asia — a result that casts doubt on whether the stimulus was needed at all.
To rebuild the nation’s fiscal health, taking a hard look at social security expenditures, such as medical and nursing care expenses that continue to grow every year with the rapid aging of the population, will be essential. But that alone would be insufficient, and the government needs to exercise tight discipline in all areas of spending.
However, the BOJ’s massive monetary easing operations and the negative interest rate policy threaten fiscal discipline by pushing down interest rates on government bonds and reducing the government’s pain in borrowing to pay for its spending. The call for a “growth-oriented fiscal policy” by taking advantage of the low interest rates, as spelled out in the fiscal 2017 budget policy, does not appear to reflect any sense of crisis over government debt, which has already topped ¥1 quadrillion.
The Abe administration maintains that it has not given up on achieving a primary balance — a condition where the nation can finance government spending other than debt-servicing costs without incurring new debt, which is seen as a critical first step toward fiscal consolidation — in fiscal 2020. But Cabinet Office forecasts show that the government will fall far short of the target even if the consumption tax is hiked to 10 percent in 2019 as planned. One wonders if the prime minister is really serious about achieving that goal.
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