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Banking & Finance

Best-case scenario still grim for Japan's public finances

Even 2% economic growth, bubble-era productivity would leave primary deficit

The Council on Economic and Fiscal Policy, chaired by Prime Minister Shinzo Abe, left, released medium- to long-term fiscal projections Tuesday.

TOKYO -- Even unrealistically robust economic and productivity growth would not be enough to bring Japan's primary balance into the black by fiscal 2020, government estimates released Tuesday show.

The Council on Economic and Fiscal Policy provided medium- to long-term projections based on two sets of conditions: a conservative baseline and high growth. The Cabinet Office arm forecasts a combined primary deficit of 8.2 trillion yen ($73.1 billion) for the national and local governments in the fiscal year ending March 2021 under the rosier scenario. The government aims to achieve a primary surplus by then, indicating that policy spending can be covered with tax revenue alone without resorting to issuing debt.

The optimistic projection assumes annual real economic growth of at least 2% and nominal growth of at least 3%. By comparison, annual real growth averaged just 1.1% and nominal growth averaged 2.1% between fiscal 2013 and fiscal 2016, during the recovery that began under the current government.

The assumptions made about productivity are similarly unrealistic. Total factor productivity growth is seen accelerating to 2.2% by the early 2020s under the optimistic scenario -- the average rate during the decade between 1983 and 1993, around the time of Japan's economic bubble. But the country has not seen productivity increase that fast since 1990. Even the conservative baseline assumes 1% productivity growth, although the actual figure for 2016 was just 0.6%.

"Assuming that real growth of 2% will continue past the [2020 Tokyo] Olympics, when there's no sign of hitting that level even now, is too optimistic," said Keiji Kanda of the Daiwa Institute of Research.

Prime Minister Shinzo Abe, who chairs the council, said that steady progress on spending reform and sustained economic growth are both essential for whipping Japan's finances into shape. But even under the growth-dependent optimistic scenario, a primary surplus would not be achieved until fiscal 2025. Under the baseline scenario, the deficit would improve to 10.7 trillion yen in fiscal 2020, but actually widen thereafter to 14.2 trillion yen in fiscal 2025.

The government's basic policy on economic and fiscal management, compiled in June, also calls for steadily reducing debt as a percentage of gross domestic product. But this goal does nothing to promote fiscal discipline, since simply growing the economy would be enough to make progress. The ratio is forecast to fall from 190% in fiscal 2016 to 163% in fiscal 2025 under the optimistic scenario.

Both sets of estimates assume that the consumption tax will rise to 10% in October 2019 as planned after two previous delays. Yet with media opinion polls this month showing support for Abe's cabinet plunging to around 30%, adopting any policies putting a heavier burden on the public would be a tough ask. A third postponement would further dim prospects for fiscal rehabilitation.

Experts on the council, drawn from the private sector and academia, emphasized realistic assumptions about the economy and urged a shift in government policy from propping up short-term demand to building long-term growth potential. They recommended holding down the annual rise in government spending on medical and nursing care to at most 500 billion yen.

(Nikkei)

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