Discussions over the government’s new fiscal consolidation plan — after its earlier target of achieving a surplus in the primary budget balance in fiscal 2020 was abandoned — highlight the bind that the nation is in as it seeks to rebuild its fiscal health.
Even as the government pushes back the target by five years to fiscal 2025, it seems to be counting on higher economic growth and tax revenue increases of a level that Japan has not seen in years to cut the budget deficit. Despite robust corporate profits, the economy’s growth can’t be counted on to pick up sufficient speed given the nation’s shrinking and aging population, which is also boosting social security expenses and inflating government spending. Yet either significantly cutting such spending or increasing the public’s financial burden through tax increases and social security premium hikes to trim the deficit would be politically challenging and portend ill for the economy’s future growth.
As the government struggles to put together a credible road map to fiscal consolidation in the face of this reality, citizens of this country should also grapple with the question of how the nation’s fiscal health can be regained.
A surplus in the primary budget balance enables the government to cover annual policy expenditures with basic revenue such as tax income without incurring new debt. Achieving that surplus is deemed a milestone in the effort to rebuild the nation’s fiscal health.
Prime Minister Shinzo Abe’s administration abandoned the target of eliminating the primary balance deficit by fiscal 2020 when it decided last fall to divert part of the additional revenue from the consumption tax increase to 10 percent in 2019 — originally meant for paying off debt — to finance additional spending on education. Well before Abe’s decision, however, that target was widely deemed to be far off. A government review of why the fiscal consolidation efforts have fallen behind shows that, in addition to such unanticipated factors as repeated postponement of the consumption tax hike, overall tax revenue fell way short of the estimate because the economy’s growth failed to match the government’s bullish forecast.
The government has since been trying to compile a new fiscal rehabilitation plan that will be featured in a policy on economic and fiscal management due this month. The new plan will reportedly push back the target for a primary balance surplus to fiscal 2025 and review its progress in 2021 against a set of three barometers — primary budget balance, fiscal balance that also counts debt-servicing costs, and the outstanding debts of the national and local governments combined — all in ratios to the gross domestic product.
The problem is that the new plan will continue to be based on the same bullish economic forecast — that the economy will grow annually by around 2 percent in real terms and by more than 3 percent in nominal terms. That’s far higher than the annual growth under Abenomics, which has remained in the 1 percent range. The fact that the economy has not grown at such rates in years puts the credibility of the plan in doubt. As for the scheduled midterm review of the plan in 2021, the targets set for each of the barometers — keeping the primary balance deficit to around 1.5 percent of GDP, fiscal deficit to within 3 percent and outstanding government debts to around 180 percent — are deemed achievable as long as GDP grows at the rate envisioned in the government scenario.
A Cabinet Office estimate of fiscal conditions released in January showed that as it is, it will only be in fiscal 2027 that the primary balance deficit will be eliminated — even under the bullish GDP growth scenario. To achieve a primary balance surplus in 2025, further efforts to trim government spending will be crucial. The government set, and achieved, a target of keeping annual increases in social security expenses within ¥500 billion during the fiscal 2016-2018 period. But the new fiscal consolidation plan is not expected to feature any such numerical targets — and will only state that from fiscal 2019 onward, annual increases in social security expenses should be kept within the range necessitated by the population’s aging.
New numerical targets were reportedly withheld in deference to opposition from Abe’s ruling coalition parties ahead of the key elections scheduled for next year. That shows how it would be difficult for lawmakers to try to reduce the deficit through sizable cuts in social security benefits.
All of the questions that surround the new fiscal consolidation plan reflect the difficulties that confront the government as it aims to restore its fiscal health, and there are no easy solutions. The public also needs to face up to this situation.