TOKYO -- The Japanese government is expected to come up with a new plan for paring down its budget deficit as early as June, but many within the ruling coalition remain concerned that further tax hikes and spending cuts could slam the brakes on the economy.
Raising the consumption tax to 10%, as is planned for October 2019, will be a key step toward better fiscal health. Instead of spending all of its revenue from the hike on reducing the national debt, the government now wants to spend 1.7 trillion yen ($15 billion) toward providing free education, among other things. It will push back its target of achieving a primary surplus from fiscal 2020 to another date to be set in June.
The Finance Ministry expects that even without the 1.7 trillion yen Japan can achieve a primary surplus by fiscal 2022 as long as it sticks to its current spending guidelines. But the ministry also assumes that the economy will continue to grow at a 2% clip in real terms and 3% in nominal terms. While the fiscal 2018 figures are expected to reach 1.8% and 2.5%, respectively, there is no guarantee this trend will continue. Japan's potential growth rate is believed to be closer to an annual 1%.
And the U.S. economy, which Japan is counting on, could slow due to interest rate hikes there.
"Carefully recalculating the expected growth rate, which connects directly to tax revenue, will boost the credibility of the government's plans," said Toru Suehiro, senior market economist at Mizuho Securities.
It remains to be seen whether the government keeps its current guideline on welfare spending, which limits natural increases to 500 billion yen or less per year, beyond fiscal 2019. Some experts are calling for significant cuts ahead of fiscal 2022, when baby boomers will start to turn 75.
But Prime Minister Shinzo Abe is opposed to setting purely numerical targets. He stressed the need to revise the entire social welfare framework instead of simply placing a cap on spending. He also touched on failed attempts under then-Prime Minister Junichiro Koizumi to reduce welfare spending by 220 billion yen every year for five years.
Defense spending is also expected to increase in fiscal 2019 and beyond, due to rising tensions related to North Korea. "If calls for greater defense spending grow stronger, we'll have a hard time saying no," a Finance Ministry official said.
Japan managed to keep increases in policy-related spending, excluding for social welfare, within 30 billion yen a year between fiscal 2016 and fiscal 2018. Greenlighting greater defense outlays could also lead to more calls to increase funding for science, technology and public works.