A midterm review by the government shows once again that fiscal consolidation efforts under the Abe administration are falling short. The primary balance deficit in fiscal 2018 is estimated to be ¥6.9 trillion larger than it was projected just three years ago — due to the postponement of a consumption tax hike and resorting to extra budgets to fund stimulus measures, as well as the economy’s growth falling short of the government’s bullish forecasts.
After giving up on its earlier goal of eliminating the primary balance deficit by 2020, the administration is seeking to come up with a new target for fiscal rehabilitation by June. But the review, presented to a recent session of the Council on Economic and Fiscal Policy, reminds us that fiscal consolidation plans counting on a rosy economic growth forecast to pay its way out of the deficit may prove to be a pie in the sky.
The current plan, put together in 2015, set a midterm target of containing the fiscal 2018 primary balance deficit within 1 percent of the nation’s gross domestic product — as a prelude to achieving a primary balance surplus in 2020. As it turned out, the primary budget balance did not improve as projected, and the deficit as of the current fiscal year is now forecast to remain at levels equivalent to 2.9 percent of GDP.
A primary budget surplus allows the government to fund its policy expenditures with basic revenue, such as from taxes, without incurring new debt. Japan has posted primary balance deficits since the 1990s, and achieving a surplus is deemed a landmark in the government’s efforts toward fiscal reconstruction. In assessing why the efforts to cut the deficit are falling behind, the review noted that while the deficit was cut by ¥3.9 trillion by streamlining government expenditures, the primary balance deteriorated by ¥4.3 trillion as tax revenue fell short of projections, by another ¥4.1 trillion as the consumption tax hike to 10 percent was shelved for the second time, and by ¥2.5 trillion due to extra spending funded by large-scale supplementary budgets.
The Abe administration maintains that there will be no fiscal rehabilitation without economic growth, placing emphasis on increased tax revenue to pare the budget deficits. The economy is indeed in good shape, with GDP growing for eight consecutive quarters — the longest growth streak since the bubble boom of the late 1980s. Still, tax revenue has not increased as forecast because GDP growth fell short of the government’s bullish projection of 2 percent real-term growth and 3 percent nominal growth, on which the forecast was based.
After the administration officially gave up on the target of achieving a primary balance surplus in 2020, an estimate released by the Cabinet Office in January indicated that without additional efforts to streamline expenditures, it would take the government until as long as 2027 to eliminate the primary balance deficit. As it explores the new target, the government is expected to try to move up the date for a primary budget balance — likely to the mid-2020s — through further efforts to cut spending. However, even that estimate is based on a growth scenario that counts on robust GDP growth at a level Japan has not achieved for years.
The “growth scenario” used in the estimate once again assumes a real-term annual growth of 2 percent and nominal growth of 3 percent — far higher than the nation’s track record of growth in the 1 percent range under Abenomics. It expects the government’s tax revenue to grow by ¥26 trillion from fiscal 2017 to hit ¥83.8 trillion in 2027. Meanwhile, the Cabinet Office also uses a “baseline scenario” in giving the primary balance estimates. Under that scenario assuming an annual growth rate in the 1 percent range, which is closer to the economy’s current performance, the nation is projected to incur a primary balance deficit of ¥8.5 trillion in 2027.
The government’s review of its own fiscal consolidation efforts puts in doubt the feasibility of plans to cut primary balance deficits that count too much on economic growth to boost tax revenue. Instead of continuing to lay hopes on the economy over-performing to fix the deficit problem, the government should base the new deficit-reduction target on a more feasible growth scenario and engage in steady efforts to streamline its spending, such as reforming social security programs in ways that require wealthy senior citizens to shoulder more of the cost of sustaining the system, so that it can come up with a more credible path toward fiscal rehabilitation.
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