Discard Govt’s Rose-Colored Glasses to Achieve Lasting Fiscal Soundness

Relying only on expectations of high economic growth can undermine fiscal sustainability. The government must squarely face the current fiscal conditions, which have become even more severe due to the spread of coronavirus infections.

The Cabinet Office has compiled the latest fiscal projection for the medium and long term. The office predicted that the primary balance of the central and local governments will fall into a deficit of ¥7.3 trillion in fiscal 2025 and will not achieve a primary surplus until fiscal 2029. Both figures are unchanged from the estimates in July last year.

The primary balance is an indicator of how much government spending can be secured through tax revenues and other means without relying on debt.

The government explained that it would be possible to achieve a primary surplus by about three years earlier than estimated if it tackled expenditure reforms and did not revise its target of realizing “a primary surplus in fiscal 2025,” which it had set before the coronavirus crisis.

In fiscal 2020, the government has compiled three supplementary budgets and has issued a large amount of government bonds. As a result, the primary deficit is expected to reach ¥69.4 trillion in the fiscal year, becoming worse than the estimate in July last year. The prospect of achieving a primary surplus should have become more distant, so it is difficult to understand why the government has maintained the target.

Even the estimate that the deficit would remain has been made on the assumption of high economic growth rate. In fiscal 2021, the real economic growth rate, excluding the impact of commodity price fluctuations, is assumed to recover to 4%, while the nominal growth rate, which is close to actual household budgets, is assumed to reach 4.4%.

In addition, in the 2020s, Japan’s nominal economic growth rate is assumed to remain at more than 3%, the highest level since the bubble economy period, due to the expansion of the investment in the digital and environmental sectors. It must be said that these assumptions have been too optimistic.

Although there is no objection to placing importance on economic growth for fiscal reconstruction, Japan’s potential growth rate, which shows its real economic power, has remained low at just under 1%.

It is also questionable whether the government will be able to reform its spending, which is the basis for maintaining the target. From 2022, the baby-boom generation will begin to be 75 or older, accelerating the pace of increase in social security costs.

The government plans to raise the ratio of out-of-pocket medical expenses paid by elderly people aged 75 or older within fiscal 2022, but this is far from being a drastic reform.

Discussions have been ruled out on raising the consumption tax rate again, and a clear path to achieving a primary surplus is nowhere to be seen.

There is the possibility that the government will need to take additional economic measures if the infectious disease cannot be brought under control. Needless to say, it is only natural for the government to take all possible measures to help families and companies in need, and it must not hesitate to spend for that purpose.

However, the government has a responsibility to seek public understanding of future reforms by squarely facing the current critical fiscal situation and presenting highly reliable estimates to the public.

Japan’s fiscal deterioration stands out among developed countries even before the coronavirus pandemic. It is necessary to eliminate overly optimistic projections and redraw the scenario for fiscal soundness.