TOKYO -- The Japanese government will likely aim to cut its primary deficit to about 1% of gross domestic product by fiscal 2018 through spending cuts and other measures, with an eye toward its goal of achieving a surplus by fiscal 2020.
The proposal will be submitted by a nongovernment member Tuesday at an economic policy meeting.
Japan's potential growth rate currently falls short of 1%, and its primary deficit is expected to total 3.3% of GDP this fiscal year at 16.4 trillion yen ($135 billion). According to conservative calculations by the Cabinet Office, which assume real economic growth of 1% or so and nominal growth of over 1%, Japan would face a primary deficit of 15.7 trillion yen in fiscal 2018 -- equivalent to 3% of GDP. The figure likely would reach 16.4 trillion yen in fiscal 2020, still 3% of that year's projected GDP.
Even under a more ambitious scenario of over 2% real growth and 3%-plus nominal growth, Japan would see a 12 trillion yen deficit, equivalent to 2.1% of GDP, in fiscal 2018. In fiscal 2020, the deficit would be 9.4 trillion yen, or 1.6% of GDP. These calculations take into account the expected effects from raising the consumption tax hike to 10% as planned in April 2017.
Japan has pledged to the international community that it will achieve a primary surplus by 2020. Intensive reforms are slated to be implemented through fiscal 2018 under a fiscal reconstruction plan to be drafted this summer. Most will focus on curbing welfare spending, currently projected to rise by 1 trillion yen each year, and other such costs. The Finance Ministry is spearheading efforts to draft detailed plans.
Tokyo also hopes for larger tax revenues from better corporate performance, higher wages and the privatization of public projects. It could encourage local governments to cut their spending as well with grants and other incentives.
All of these efforts could improve the primary balance by about 6 trillion yen compared with the high-growth fiscal 2018 scenario, or by about 1 percentage point of GDP, putting the country in line with the proposed interim goal.
The government will not consider raising the consumption tax rate past 10% for the near future. Prime Minister Shinzo Abe and Akira Amari, minister in charge of economic revitalization, worry that such measures would weigh down the economy.
The GDP-based goal was designed as a compromise to Abe administration officials who are hesitant to set a target amount for spending cuts. But with a percentage target alone, unexpected growth by the Japanese economy could undermine efforts to tighten the fiscal situation.