The latest Cabinet Office estimate puts the government’s target of achieving a primary balance surplus in fiscal 2020 further in doubt. The projected deficit as of the target year increased by ¥2.8 trillion from the previous estimate just six months ago, as tax revenue fell short of the government’s plan due to a fallback in corporate profits and slowing growth in people’s income. Even the dire projection is based on a rosy scenario of Japan’s economy in the coming years maintaining a level of growth never achieved in the past two decades. The Abe administration maintains that there will be no fiscal consolidation without economic growth, but the figures suggest that its policy has not worked to make the government’s primary balance surplus goals more credible.
Since the 1990s, Japan has not had a surplus in the primary balance of the national and local governments combined — a condition where the government can pay for its annual policy-related expenses out of its basic income such as tax revenue without incurring new debts. The 2020 target is deemed a first step in the efforts toward fiscal rehabilitation. But according to the Cabinet Office estimate in late January, which is updated every half year, the nation is now projected to incur a primary balance deficit of ¥8.3 trillion in fiscal 2020 — compared with ¥20 trillion in fiscal 2016 and ¥13.8 trillion in 2018.
The administration of Prime Minister Shinzo Abe has placed priority on economic recovery — and twice postponed hiking the consumption tax to avert stalling the fragile and uneven growth under his watch. But his scenario of rebuilding the government’s fiscal health through increased tax revenue on faster growth of the economy has hit a wall. In the fiscal year to March, tax revenue is projected to fall short of the government’s projection as the yen’s appreciation for much of last year — until Donald Trump’s election as U.S. president in November — reduced the earnings of export-oriented businesses. In updating the primary balance estimate, the Cabinet Office expected the impact to continue to hurt tax revenue in coming years, along with sluggish growth in consumption tax revenue due to weak consumer spending.
Officials of the administration say they will not give up the 2020 primary balance surplus goal. But the projection continues to be way off its target. As a mid-term target for the 2020 goal, the administration has said it will contain the primary balance deficit in fiscal 2018 at 1 percent of the gross domestic product. The Cabinet Office estimate now puts the 2018 deficit at 2.4 percent of GDP, worse than the 1.9 percent projected last July.
The problem is that the deficit estimate is built on a scenario that Japan’s economy will annually grow at least 3 percent in nominal and 2 percent in real terms. Yet the nation’s nominal growth has never reached 3 percent in the past 20 years. The Cabinet Office has released a different set of estimates — based on a more sober growth scenario closer to the economy’s track record — that projects the 2020 primary balance deficit at ¥11.3 trillion and growing even larger each year.
Under Abe’s watch, general expenditures in the government’s annual budget have continued to increase, reaching a record ¥97.45 trillion in the fiscal 2017 budget now before the Diet. The budget relies on new government bonds to pay for 35 percent of the expenses. The Finance Ministry reportedly estimates the sharp increase in the amount of outstanding government bonds to continue, mainly on the mushrooming of social security expenses to cover the rapidly aging population. The amount is projected to rise from ¥858.6 trillion at the end of fiscal 2017 and reach ¥1.029 quadrillion in fiscal 2026 — an increase of nearly ¥200 trillion in the coming decade. The government’s total debt including borrowings and short-term securities already stands at ¥1.063 quadrillion as of the end of last September.
There are views calling for more fiscal measures to bolster the economy as the effects of the Bank of Japan’s nearly 4-year-old monetary stimulus appear to be waning. Some say that fiscal consolidation, including the 2020 primary balance surplus target, should not be prioritized at the expense of the economy. That may be a choice for the government to make. But then the government should make clear what it intends to do with fiscal rehabilitation. It would be irresponsible for the administration to reiterate its commitment to the primary balance goals without taking effective steps to achieve them other than by solely relying on growth to eliminate the deficits.
By subscribing, you can help us get the story right.