The government’s latest medium- to long-term economic and fiscal estimate shows that it will fall short of a primary balance surplus by ¥2.3 trillion in fiscal 2025. Even if the consumption tax is raised to 10 percent in October as planned, the government expects to miss its target of a surplus in 2025 by at least two years. The estimate, presented to a meeting last week of the Council on Economic and Fiscal Policy, is yet another reminder that the government, for its goal of fiscal rehabilitation, needs to do more to reduce spending and boost revenue to cut the deficit based on a more practical scenario.
The estimated deficit in the primary budget balance as of 2025 increased by ¥1.2 trillion from the previous Cabinet Office forecast in January, as the government downgraded the fiscal 2019 GDP growth forecast from the initial 1.3 percent to 0.9 percent — due the further slowdown in China’s economy amid its trade disputes with the United States and resulting falls in Japanese exports to the Asian market — and factored in the anticipated decline in tax revenue.
A primary balance surplus enables the government to cover for its policy-related expenses without incurring fresh debts. The total debt incurred by the national and local governments combined has topped ¥1.1 quadrillion. Achieving a primary balance surplus — and not incurring fresh debt each year — is deemed a milestone in the nation’s efforts to rebuild its fiscal health.
The problem is that the primary balance estimate is based on a rosy scenario of higher growth than the nation has experienced in recent years. The latest estimate factors in the lower growth forecast for this year but still assumes that the Japanese economy will achieve more robust growth of 2 percent on a real-term basis and 3 percent in nominal terms beginning in fiscal 2023.
That scenario appears overly optimistic, given that the domestic economy grew a mere 0.7 percent in real terms and 0.5 percent in nominal terms in fiscal 2018 — and that uncertainties are growing over the prospect of the world economy.
In another estimate based on a growth scenario closer to the economy’s performance in recent years — of around 1 percent in both real and nominal terms — the government will still face a primary balance deficit of ¥7.2 trillion in fiscal 2025, which will require the government to do much more to trim its expenses and increase tax revenue if it wants to avoid once again pushing back the surplus target.
The administration of Prime Minister Shinzo Abe has maintained that there will be no fiscal reconstruction without economic growth. Tax revenue has indeed increased under Abe’s watch. Tax revenue of the national government reached ¥60.4 trillion in fiscal 2018, topping the previous annual record marked in 1990 at the height of the bubble boom, and the government forecasts the revenue in fiscal 2019 to hit ¥62.5 trillion.
Nevertheless, the administration has already pushed back the government’s earlier target of a primary balance surplus in 2020 by five years, and the latest estimate shows that a surplus in 2025 is far from secure. Economic growth will be a must to increase tax revenue and rebuild fiscal health, but a plan for fiscal reconstruction based on a rosy economic growth forecast will put the credibility of the plan in doubt.
The Cabinet’s guideline on fiscal 2020 budgetary requests, based on which each ministry and agency will submit their request for next year by the end of August, did not set an upper limit on government spending as a whole in the 2020 budget. It calls for fiscal measures to ease the impact of the consumption tax hike to continue next year. General account expenditures in the draft 2020 budget to be compiled by the year’s end are likely to once again top ¥100 trillion, possibly surpassing the record ¥101.45 trillion of fiscal 2019.
The ballooning social security expenses of the rapidly aging population account for one-third of the government’s annual spending. These expenses are forecast to start expanding sharply in 2022 when the postwar baby boomers begin to turn 75 — the age around which the need for medical services and nursing care increases.
To sustain the social welfare system under the demographic pressure of the rapidly aging population, fundamental reforms, including reviewing the benefits for and the burden on the elderly, will become inevitable. Efforts need to start in earnest to streamline and cut more expenditures in compiling the budget for fiscal 2020, so as to kick off the endeavor to achieve a primary balance surplus and put fiscal reconstruction on track.
IN FIVE EASY PIECES WITH TAKE 5