Japan in danger of missing 2020 budget target
Japanese prime minister Shinzo Abe answers questions from the opposition Democratic party of Japan leader Banri Kaieda (not pictured) during the lower house parliament session in Tokyo on January 28 2014©AFP
Japan is on course to break a pledge to balance its budget by 2020, according to a new government forecast that sets up a battle between fiscal hawks at the ministry of finance and doves in the cabinet of Shinzo Abe, prime minister.
Private-sector economists have long seen as ambitious the government’s goal of erasing its primary deficit – the gap between revenues and expenditure, excluding debt payments and bond issuance.
Yet, last week the ministry of finance (MoF) made its first admission that the target was unlikely to be hit, saying that even with the most optimistic assumptions for growth and cuts to spending, the deficit would be as wide as Y6.6tn ($64bn) in the 2020 fiscal year.
Analysts said the projection seemed timed to coincide with the beginning of discussions on corporate tax reform this month, under the “third arrow” of Mr Abe’s economic policy. While the prime minister is set to push for growth-friendly measures such as bringing down Japan’s effective corporate tax rate of about 35 per cent, MoF worries that such moves could threaten revenues, casting doubt over the government’s determination to repair its finances.
“By emphasising [the missed target], MoF would perhaps like to press Mr Abe into an expansion of the corporate tax base in return for a cut in the corporate tax rate,” said Kyohei Morita, chief economist at Barclays in Tokyo.
The forecast underscores tensions over the best way to improve Japan’s fiscal condition, which has steadily worsened over the past two decades amid shrinking tax revenues and rising social security payments. Achieving a balance in the primary budget is a vital first step in tackling long-term debt that is equivalent to about 16 years of tax receipts.
Since taking power just over a year ago, Mr Abe has vowed to use a “flexible” fiscal policy as one of several levers to lift nominal output in the world’s third largest economy. Among his first acts was to unveil a Y10tn fiscal stimulus package, which he followed with another Y5tn of extra spending to smooth the impact of a long-scheduled rise in consumption tax this April.
He also scrapped a 2.55 per cent surcharge on corporate tax for the reconstruction of areas hit by the March 2011 disasters, one year earlier than planned.
But many say more fiscal tightening cannot be put off for much longer. According to MoF’s draft budget for the next fiscal year beginning in April, the government’s primary deficit will stand at Y18tn, on spending of Y73tn, tax receipts of Y50tn and another Y5tn from reserve funds.
That means it may achieve the first part of an international commitment made in 2010, to halve the primary deficit as a percentage of gross domestic product – to 3.3 per cent – by 2015. But a surplus by 2020 will be out of reach, according to last week’s forecast which assumes nominal growth of 3 per cent a year and annual spending cuts of 1.5 per cent.
The forecast also assumes that Japan will follow through with a second increase in consumption tax scheduled for October 2015.
“We know from this estimate that we have lots of things to do,” said a senior MoF official. “Even with economic growth we would not achieve fiscal consolidation, and even with expenditure rationalisation we cannot easily hit the target.”