TOKYO -- Japan will lean heavily on higher tax revenue to get its finances in order, Prime Minister Shinzo Abe indicated Monday.
It will aim to more than halve the primary balance deficit as a percentage of gross domestic product over the period ending fiscal 2018 in a fiscal reform plan due out by the end of the month. The plan will aim to bring the primary balance into the black in fiscal 2020, assuming high economic growth.
The deficit now stands at 3.3% of GDP. It should be brought down to about 1% in fiscal 2018 as a medium-term target, Abe said in a meeting of the Council on Economic and Fiscal Policy. Chief Cabinet Secretary Yoshihide Suga stressed the importance of assuming that economic revitalization will boost tax revenue.
A fiscal 2020 surplus is an ambitious target, since even a streak of 2%-plus real economic growth would leave the balance 9.4 trillion yen ($74.7 billion) in the red that year.
As the Ministry of Finance and some in the ruling Liberal Democratic Party push for further spending cuts, Abe and the CEFP are apparently counting on revenue to grow.
"Key indicators of the economy and employment are all pointing in a positive direction," Economic and Fiscal Policy Minister Akira Amari told a news conference after a cabinet meeting Tuesday, expressing confidence that Japan will stay on a growth track.
The Cabinet Office, which serves as the CEFP's secretariat, came up with the medium-term target and proposed it to Abe a month ago. Raising the consumption tax to 10% in April 2017 as planned would shrink the primary balance deficit by 0.8 point from the current 3.3% of GDP, leaving a 2.5% deficit to eliminate with annual 0.5-point reductions over five years, a Cabinet Office official explained. Abe accepted the target.
Abe's focus on growth appears to stem from the popularity of GDP-related targets in the government and his own resolve to beat deflation -- a task he sees as key to his own government's stability. With an upper house election looming next year, the prime minister is tending toward caution on spending cuts because they could draw criticism from the public and within the LDP.
Meanwhile, the Ministry of Finance is alarmed by the discussions at the Cabinet Office and the CEFP, which could undermine efforts to curb spending. An assumption of brisk growth will make belt-tightening more difficult.
"We need to set some yardstick for expenditures," Finance Minister Taro Aso warned Monday at the CEFP meeting.
LDP Policy Research Council chief Tomomi Inada criticized the high-growth assumption, saying that "we should not be counting on unlikely scenarios."
With Japan's potential growth rate seen at less than 1%, many are skeptical of the scenario.