Budget Proposal for Next Fiscal Year: Steep Path to Fiscal Consolidation despite Increased Tax Revenue

Editorial

15:45 JST, December 28, 2024

What should the national budget be like to realize a society in which people can live with peace of mind? The government should work toward achieving both Japan’s economic growth and fiscal consolidation, thus securing funds for the future.

The government has approved the budget proposal for fiscal 2025 at a Cabinet meeting. The total amount of the general account is ¥115.5 trillion, up about ¥3 trillion from the initial budget proposal for fiscal 2024. It is the largest budget proposal, exceeding the previous record high from two years ago.

This is mainly due to social security expenditures, including medical care and pensions, totaling ¥38.2 trillion, surpassing the ¥38 trillion mark for the first time.

Despite reforms for expenditures, such as lowering drug prices and revising the high-cost medical expense benefit system, which reduces the burden on patients when medical care costs are high, social security expenses grew significantly due to the aging population, ultimately increasing by ¥558.5 billion.

Improvement of the social security system is indispensable to dispel the public’s future anxieties. On the other hand, it is also essential to secure funds for the future, such as for the promotion of science, childcare support and industrial development.

It is important to make efforts to further curb social security spending, which accounts for one-third of total expenditures.

Defense spending was also the largest ever at ¥8.6 trillion, up about ¥750 billion from the previous fiscal year. But this is an indispensable expense given the severe security environment around Japan.

The national debt, including government bonds, exceeds ¥1.3 quadrillion, the worst level among major industrialized nations. The cost of interest payments on debts also increases due to rising interest rates, and expenditures to be used mainly for interest payments on government bonds were the largest ever at ¥28.2 trillion.

If Japan transitions to a growth-oriented economy in which both wages and investment increase, prices and interest rates will also rise. For this reason, the cost of interest payments will inevitably increase. Wasteful spending will need to be constantly reduced.

What stands out in the budget proposal is that tax revenue is estimated at a record ¥78.4 trillion. This is an ¥8.8 trillion increase compared to the previous fiscal year, against a background of high prices and robust corporate performance.

Still, this is definitely not enough to cover the budget needed for policies. For this reason, the government plans to newly issue government bonds worth of ¥28.6 trillion. The path to fiscal consolidation is a steep one.

The government will submit a budget proposal to the ordinary Diet session next year. However, during negotiations between the ruling and opposition parties, there is a possibility that the government will be forced to revise it.

In the budget proposal, tax revenue is estimated to be reduced by around ¥700 billion as a result of raising the ¥1.03 million annual “income barrier,” the threshold for the imposition of income tax, to ¥1.23 million.

The opposition Democratic Party for the People continues to demand that the threshold be raised to ¥1.78 million, which is estimated to result in a ¥7 trillion to ¥8 trillion decrease in tax revenue.

With the difficulty of curbing expenditures, there is little room for a large-scale permanent tax cut. Realistic discussions are necessary.

(From The Yomiuri Shimbun, Dec. 28, 2024)