Thanks to the consumption tax hike in October, the government coffers will see an infusion of funds next fiscal year. But since the government plans a record amount of spending, it will still have to borrow money and the mounting debts will continue to rise. At least that is how the draft budget for fiscal 2020, adopted by the Cabinet on Friday, appears at first glance.
The size of the draft budget is a whopping ¥102.66 trillion and marks the eighth straight year of increase. It is also the second consecutive year that the ¥100 trillion mark will be surpassed.
One of the main reasons for all this spending is the rising cost of social security. About 35 percent of the government’s general expenditures, or ¥35.86 trillion, will be spent on social welfare. The proposed sum represents a 5.1 percent increase from fiscal 2019, a more substantial hike than the 3. 2 percent jump earmarked in the initial fiscal 2018 budget. Though Finance Minister Taro Aso labeled the current draft as a budget that achieves “both economic regeneration and fiscal consolidation,” it is hard to foresee Japan’s fiscal health improving in the near future.
On the revenue side, the consumption tax hike to 10 percent is estimated to help boost government revenue to a record high ¥63.51 trillion. But that amount is calculated based on the government’s assumption that the economy will expand 1.4 percent in fiscal 2020, much higher than the growth rate of around 0.5 percent estimated by the private sector. Given the fact that the expected tax revenue this fiscal year had to be revised downward by ¥2.3 trillion compared with the initial fiscal 2019 budget, wouldn’t it be better for the government to take a more conservative viewpoint on economic growth projections and the expected tax revenue for fiscal 2020?
The jump in tax income will be partially offset by some of Prime Minister Shinzo Abe’s pet projects.
His policy initiative to offer free day care and reduce the cost of higher education carries a price tag of ¥1.7 trillion. The project is to be funded by the increased consumption tax revenues.
Under the preschool subsidy program, fees at all authorized preschools will be scrapped for children between the ages of 3 and 5 while a monthly subsidy cap of ¥25,700 will be set for some private kindergartens. The government initially estimated the cost to be about ¥776 billion, but that has ballooned to ¥886 billion in the draft budget as the number of users is expected to increase. Since the program offers free services for all children from 3 to 5 years old in authorized preschools, half the spending will benefit households with annual income of more than ¥6.4 million. Thus, some criticize the program as benefiting wealthy families rather than helping low-income households. It is questionable whether it was really necessary to extend free day care services across the board regardless of income levels.
Since there are many children waiting to enter day care centers, a wiser use of this money would be to create more room for those children on waiting lists or to raise salaries for day care teachers. It is necessary to support families with children, but determining which policy measures deserve higher priority needs to be done carefully.
Moreover, the aging of Japanese society is likely to accelerate in the near future. It is highly expected that Japan’s social security costs will rise sharply come 2022, when postwar baby boomers reach age 75. The government must act quickly to reform the social security system to ensure that it remains sustainable.
Last week, the government announced a policy to raise the proportion of medical expenses paid by people age 75 and above with a certain level of affluence to 20 percent from the current 10 percent. Though the parameters of the new policy have yet to be decided, it is a first step in reducing the burden facing future generations. The government needs to implement similar measures more aggressively.
Long-term debts owed by the national and local governments will hit ¥1.122 quadrillion, or about 200 percent of GDP, by the end of fiscal 2019. The so-called primary balance — tax revenue minus expenses other than debt-servicing costs — has also worsened compared with the initial fiscal 2019 budget and the deficit will be ¥9.204 trillion for this fiscal year. The government has already extended the target year to achieve the primary balance from 2020 to 2025. But given the expected increase in social security costs, it is questionable whether the government can meet the 2025 target, either.
Abe has said the consumption tax will not be raised for another 10 years. But unless the government cuts spending on low-priority projects and spends taxpayer money more wisely to focus on long-term sustainability, Japan’s fiscal consolidation will never be achieved.