Concrete measures vital to achieving goal for primary balance surplus

The nation’s fiscal condition is deteriorating rapidly, as a result of measures taken against the novel coronavirus. Despite this, if the government does nothing but set a target based on an optimistic outlook, it will not be able to pave the way for fiscal consolidation.

Prime Minister Fumio Kishida has expressed his intention to maintain the goal of achieving a surplus in the primary balances of the central and local governments in fiscal 2025, saying that the nation is “not in a situation where a change is necessary.”

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

According to new fiscal projections compiled by the Cabinet Office, the primary balances are estimated to post a deficit of ¥1.7 trillion in fiscal 2025 and turn to a surplus of ¥200 billion in fiscal 2026.

The latest projections expect that a surplus will be achieved a year earlier than was forecast in the previous projections compiled last summer, on the assumption that the recovery trend in tax revenues will continue due to the improvement of corporate earnings.

Furthermore, with reform of social security expenditures and other measures, achieving a primary balance surplus in fiscal 2025 will be feasible, according to the projections.

However, the projections are simply too optimistic. The central government’s tax revenues are estimated to reach a record high of about ¥64 trillion in fiscal 2021 and continue to set new records, but the basis for this remains unclear.

The real economic growth rate, which is used as a gauge, is expected to be 2%, excluding the impact of commodity price fluctuations, while the nominal growth rate, which is close to what is felt by actual households, is estimated to remain around 3% from fiscal 2022 to fiscal 2025. However, this is far from reality.

In the past 10 years, the real growth rate has exceeded 2% only once, in fiscal 2013. Similarly, the nominal growth rate surpassed 3% once, in fiscal 2015.

According to the projections, the “virtuous cycle of growth and distribution” advocated by the prime minister will help the potential growth rate, which reflects real economic capacity, increase to nearly 2% in fiscal 2025, up from 0.6% in fiscal 2021. These are all assumptions, and based on all the measures and policies presented so far, the estimate is not convincing.

Expenditure estimates are also optimistic. The central government’s spending, which ballooned to over ¥140 trillion in fiscal 2021, was forecast to hover below ¥110 trillion from fiscal 2022 to fiscal 2025.

However, in recent years, it has become common practice to compile a large supplementary budget due to the measures taken to tackle the pandemic. These budgets also include spending on growth strategies and public works projects.

As the baby boomer generation will begin to turn 75 or older in fiscal 2022, social security costs are expected to snowball. It is not clear how to curb these costs.

If the central government is to stick to its goal, it should set out concrete measures to make sure the projections will not merely be figures based on convenient estimates. There are fears that an optimistic outlook could rather lead to the loosening of fiscal discipline.

Even if a primary balance surplus is realized, this will be only the first step in fiscal reconstruction. Just making this happen could be difficult under the current fiscal situation in Japan. It is necessary to reconsider the strategy and come up with a realistic one.

The original Japanese article appeared in The Yomiuri Shimbun on Jan. 24, 2022.