Future of nation’s fiscal management is unclear

How will the government rebuild the nation’s finances, which have deteriorated due to massive spending for coronavirus control measures as well as the graying of the population? The government and ruling parties should present a medium- to long-term fiscal vision as early as possible.

The government has approved the Basic Policy on Economic and Fiscal Management and Reform at a Cabinet meeting. Regarding the government’s goal of bringing the primary balance at the central and local governments into the black, the central government decided not to specify in the basic policy the target year of “fiscal 2025” that was spelled out in last year’s basic policy.

While stressing that the “flag” of fiscal consolidation will not be lowered, the basic policy also stated that “options for important policies should not be narrowed.”

It is extremely difficult to understand how the government intends to manage its finances.

Within the ruling Liberal Democratic Party, there is a conflict between forces led by former Prime Minister Shinzo Abe that emphasize aggressive fiscal spending and forces that value fiscal discipline. A tug-of-war is said to have been fought over whether to specify the target fiscal year in the basic policy, and Abe’s desires were finally reflected in the basic policy.

The goal of turning the primary balance into the black in fiscal 2025 has been increasingly criticized for its optimistic assumptions about the growth rate and other factors. This is not the time to divide the party into two sides and argue about an unrealistic target.

Rather, it is necessary to face the current situation and start discussions to redraw the path toward fiscal reconstruction.

Japan’s finances have been in a critical situation since before the coronavirus pandemic. The national debt, including government bonds, had reached ¥1.216 quadrillion as of the end of fiscal 2020, partly due to the compilation of massive supplementary budgets to deal with the coronavirus pandemic. This is an increase of as much as about ¥102 trillion from the end of the previous fiscal year.

Major Western nations, which like Japan have increased their fiscal spending to control the coronavirus, have already shifted their focus to fiscal reconstruction and begun discussing tax hikes to improve their fiscal balance. Japan cannot be the only country to continue its uncontrolled fiscal spending.

If nothing is done, the public’s anxiety over the future will only increase. The government and ruling parties must quickly consider concrete measures to rebuild the nation’s finances, for example through the reform of social security spending and other expenditures.

On the other hand, as the security environment surrounding Japan has become increasingly tense, increasing defense spending has become a major issue.

The basic policy calls on the government to “drastically strengthen the nation’s defense capabilities within five years.” The draft basic policy released last month only stated the need to “greatly heighten defense capabilities” — the target period was added to the basic policy after the LDP discussed it.

However, the basic policy does not indicate how to secure financial resources for that purpose. Given the tight fiscal environment, the budget should not be inflated as a result of prioritizing the scale of the budgetary framework. It is important to study specific equipment and systems to deal effectively with possible situations.

(From The Yomiuri Shimbun, June 8, 2022)