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Economy

Japan's long road to fiscal health may be getting longer

Higher education, military spending dim hopes for quick budget turnaround

Increased education and defense outlays could put Japan deeper in a budgetary hole.

TOKYO -- Japan's government has set itself the goal of achieving a primary budget surplus -- that is, not including interest payments on government debt -- by fiscal 2020. But it is still spending more than it takes in taxes, making that target look increasingly unrealistic.

Japan is forecast to run a primary deficit of 8.3 trillion yen ($72.2 billion) in the budget year beginning April 2020, even if its growth, unadjusted for inflation, is running at 3%, the Cabinet Office said Wednesday.

During the regular Diet session that opened Jan. 20, Prime Minister Shinzo Abe stressed the importance of education, noting that this year marks the 70th anniversary of the enforcement of the Constitution of Japan, which stipulates that all citizens are entitled to nine years of free, compulsory education. Lawmakers from both the ruling and opposition parties called for improvements to the country's education system during parliamentary questions.

Some opposition parties are pushing for free higher education, which could cost 5 trillion yen a year. If that change were introduced, even step by step, it would significantly raise spending from the Cabinet Office's current forecast of 106.7 trillion for fiscal 2020. The policy change is not included in the Cabinet Office's medium- and long-term projections.

Defense spending is rising as well. Facing a deteriorating security environment in East Asia and demands for higher military spending from the new administration of U.S. President Donald Trump, Japanese think tanks, including the Institute for International Policy Studies, chaired by former Prime Minister Yasuhiro Nakasone, are calling for the country's defense budget to be expanded to 1.2% of gross domestic product.

Abe has also been keen to bulk up Japan's military. Thus, it is unclear whether the country can hold defense outlays to less than 1% of GDP, as stated under the medium-term defense program, which will be revised in fiscal 2019.

Swelling costs

Social security spending, the biggest item in the budget, is also climbing. The Cabinet Office expects the country's social security outlays to rise by about 700 billion yen on the year to 33.2 trillion yen in fiscal 2018.

To meet its goal of curbing the natural increase in social security costs to less than 1.5 trillion yen between fiscal 2016 and 2018, the government held the rise in social security spending to 500 billion yen in its fiscal 2017 supplementary budget. It did this by raising elderly health care recipients' out-of-pocket charges. The Cabinet Office's projections, however, exceeded the goal easily.

The Abe government has compiled extra budgets of more than 3 trillion yen, year after year, which could also worsen the country's fiscal position. The initial budget for fiscal 2017 swelled to a record 97.4 trillion yen.

Nevertheless, Masahiro Nishikawa, chief fiscal policy analyst at Nomura Securities, remains optimistic. "Issuing deficit-covering government bonds worth 1.7 trillion yen in the third supplementary budget for fiscal 2016 enabled the government to formulate a supplementary budget of up to 3 trillion yen without issuing additional bonds," he said. This has also made it easier for the government to take aggressive fiscal policy.

With only three years left until fiscal 2020, unexpected developments that may push public spending higher, may force the government to revise its estimates for social security and other costs.

(Nikkei)

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