Clearly Present Specific Measures to Turn Japan’s Finances Around

How will the government restore the nation’s finances, which have deteriorated further due to the novel coronavirus pandemic? Rather than setting a target based on an overly optimistic outlook, it should present concrete measures to achieve a surplus in the primary balance of the central and local governments.

According to mid- and long-term fiscal projections released by the Cabinet Office, which are revised twice a year, a primary balance surplus will be achieved in fiscal 2026 if the Japanese economy continues its high growth and tax revenues increase.

Primary balance is an indicator of the amount of policy spending that can be covered through tax revenues and other means, without relying on debt.

The government’s fiscal expenditure ballooned due to measures to deal with the coronavirus, and the primary balance deficit increased from about ¥10 trillion in fiscal 2018 to about ¥50 trillion in fiscal 2022.

However, the government’s pre-pandemic target of achieving a primary balance surplus in fiscal 2025 has remained unchanged. According to the projections, this target will become feasible if expenditures are streamlined.

However, it must be said that there is little evidence to support this claim. The projections are based on the assumption that the nominal growth rate will remain at 3% or higher, but in reality, the rate has exceeded 3% only once in the past 20 years.

The assumption itself — that productivity will increase to achieve high growth due to the effects of the government’s economic measures, such as the promotion of digitization — is too optimistic. If the government believes that it is possible to achieve the target, it must clearly present a road map for expenditure cuts and economic revitalization, which are prerequisites for achieving the goal.

The potential growth rate, which represents the strength of Japan’s economy, is said to be in the 0% range. The Cabinet Office has also estimated that even by fiscal 2032, a primary balance surplus will not be achieved if the low potential growth rate continues near that level. It is necessary to face up to reality and manage finances based on a stricter outlook.

The projections also fail to take into account the impact of a plan to double the budget for child-rearing, one of Prime Minister Fumio Kishida’s signature policies. The funding sources for this plan, likely to be in the trillions of yen, have yet to be determined. If this amount is to be covered by government bonds, it will be even more difficult to achieve a primary balance surplus.

Many other countries, too, have undertaken massive fiscal spending to address the coronavirus pandemic, but recently, there has been a growing movement among them toward fiscal reconstruction.

The United States has reportedly reduced its budget for the relief of small and midsize enterprises and impoverished households, cutting annual expenditures by about ¥70 trillion. Britain has announced fiscal reconstruction measures, including higher taxes on energy companies and the wealthy.

There is an urgent need for Japan, which has the worst fiscal situation among major countries, to promote spending reform.

There is a view that the Bank of Japan will revise its massive monetary easing measures in the future. There is also a fear that long-term interest rates will rise and the burden of interest payments on government bonds will balloon. It is imperative that the government and ruling parties restore fiscal discipline.

(From The Yomiuri Shimbun, Feb. 2, 2023)