TOKYO -- The most rose-colored perspective of Japan's future economic landscape foresees a deeper primary deficit in fiscal 2020 than projected earlier, suggesting that the government must undertake radical entitlement reforms in order to fulfill its goals of posting a surplus that year.
Japan is seen recording a primary deficit of 8.3 trillion yen ($73 billion) in the budget year beginning April 2020, the Cabinet Office reported Wednesday to the Council on Economic and Fiscal Policy. The figure is 2.8 trillion yen larger than the outlook released last July, due to the adverse effect of the strong yen on fiscal 2016 tax receipts.
The primary balance is a key financial indicator that shows whether the national and local governments are able to cover their policy spending with revenue. The goal to bring that metric to the black has also served, in effect, as a pledge by the Japanese government to the international community.
Prime Minister Shinzo Abe does not plan to wave the white flag, but he faces a difficult road ahead in staying true to his word.
The prospect of a primary surplus in fiscal 2020 "has become remote," said Ryutaro Kono at BNP Paribas. "The difficult nature of fiscal consolidation, premised on high growth and high inflation, has been brought into sharp focus."
Private economists believe that achieving the budgetary goal under the status quo is problematic. If the government wishes to use the consumption tax to cancel out the 8.3 trillion yen red ink due in fiscal 2020, the rate will need to be lifted to around 13%. But the rate can be no higher than 10% as of fiscal 2020 because a tax hike has already been postponed twice, with the next increase to 10% scheduled for October 2019.
In any case, the government is basing its primary balance outlook on the most optimistic economic growth forecasts. The real economy is seen expanding by at least 2% in the medium-to-long term. Nominal growth, which incorporates inflation, is expected to advance by 3% or more.
The nominal gross domestic product will swell to 600 trillion yen in fiscal 2020, then to 700 trillion yen in fiscal 2024, according to the government. Meanwhile, long-term interest rates are expected to climb to 2.6% in fiscal 2020, which would be a high last seen in the late 1990s.
Even under those rosy presumptions, administration officials were forced to downgrade their primary deficit projections due mainly to recent tax revenue. The strong yen diminished the assumed corporate tax intake for the current fiscal year from 57.6 trillion yen to 55.9 trillion yen.
Receipts from income and consumption taxes are anticipated to lag further as well. The Cabinet Office believes more people will spend less of their earnings amid pension worries and similar concerns.
Eye on the prize?
The Abe government has set a tentative goal of reducing the primary deficit to about 1% of the GDP in fiscal 2018, but Wednesday's outlook foresees the ratio shrinking to only 2.4%. That does not bode well for producing a primary surplus in fiscal 2020.
Despite that, Abe remains adamant that the target will be met. "We will realize a primary surplus in fiscal 2020," he told the upper house on Tuesday. Abe also said, "we are steadily reducing the ratio of outstanding obligations against the GDP over the medium-to-long term," seemingly putting a greater emphasis on the debt load than the primary balance.
The government predicts the debt-to-GDP ratio will continue to decline from a peak of 189.5% in fiscal 2016. Chronically low interest rates are seen keeping the lid on debt-servicing costs, and the economic expansion is expected to magnify the GDP denominator. The idea that there is no rush to balance the budget might gain currency within the ranks of the central government and the ruling bloc.
But again, these numbers are based on the most optimistic of forecasts. On the low end, the nominal economy would grow by as little as roughly 1.5%, while the real economy would inch up by less than 1%. In that scenario, fiscal 2020 would be hit with an 11.3 trillion yen primary deficit -- 2.1 trillion yen worse than the previous outlook. These calculations also assume the government goes through with sales tax increase in 2019, regardless of economic uncertainties.