TOKYO -- Japan's goal of reaching a primary budget surplus, a measure that excludes debt service costs, is now expected to recede to fiscal 2027 as Shinzo Abe's government seeks to divert tax revenue meant to reduce borrowing to social programs.
The latest Cabinet Office fiscal projections will be presented to the prime minister's Council on Economic and Fiscal Policy in late January. The previous forecast, issued in July 2017, pointed to a primary surplus in fiscal 2025.
The new figures, like the earlier ones, assume real economic growth of 2% or more and nominal growth of at least 3% in the medium to long term. But even under the same economic scenario, the Cabinet Office now forecasts a roughly 10 trillion yen ($89.6 billion) primary deficit in fiscal 2020, up from the 8.2 trillion yen, or 1.3% of gross domestic product, predicted in July. This increase extends the timeline for reaching a primary balance by two years.
The Abe government signaled it was ready to abandon a goal of reaching a primary surplus in fiscal 2020 during the run-up to last October's lower house election, when the ruling Liberal Democratic Party promised to redirect part of the proceeds of a consumption tax hike planned for October 2019. Originally, 80% of the additional revenue brought in by the increase was to go toward curbing government borrowing. Now, a portion is to be used to pay for new and expanded social programs such as child care assistance, part of the Abe government's high-profile "people-building" initiative.
A more conservative estimate of productivity growth also plays into the longer fiscal recovery timeline. Last July's figures assumed growth in total factor productivity would rise to 2.2% by the beginning of next decade. But with current productivity growth estimated at a meager 0.7%, even some in the Cabinet Office believe 2.2% is too ambitious, regardless of current efforts to squeeze more output out of Japan's shrinking population.
Enhancing growth will require expanding the workforce, increasing business investment and advancing technological innovation. More employment opportunities for groups such as women and seniors are expected to contribute to the first element, and capital spending is expected to keep rising, at least for now. But the impact of new technologies such as artificial intelligence is more difficult to discern.
Government spending is seen staying on the track laid out in previous Cabinet Office projections. An informal rule of capping annual "natural" growth in social security outlays at 500 billion yen will be suspended in fiscal 2018, which begins April 1. As for fiscal 2019 and beyond, the new projections will say only that growth will reflect population aging and increases in prices and wages.
The Abe government plans to produce a new set of fiscal health targets by summer based on the upcoming projections. It could target a primary surplus before fiscal 2027 by factoring in yet-to-be-decided spending controls. In previous discussions within the government, opinion has been split between several potential target years, most prominently fiscal 2022 and fiscal 2025. If social security reform fails to free up enough money, "measures such as another consumption tax hike must be considered," said Yoko Takeda, chief economist at the Mitsubishi Research Institute.
Abe told a meeting of the fiscal policy council last October that he aimed to meet the country's fiscal consolidation goals as soon as possible. But he said that closing the fiscal gap would not be easy, calling reform, rather indiscriminate spending controls, a key piece of the puzzle.