Unrealistic Budgetary Goal

The Cabinet Office issued on Monday its estimate of Japan’s primary budget balance which was expected to be in the red in FY 2025. That means that a policy goal of turning the balance into the black by FY 2025 will not be achieved. The primary deficit of national and local governments will be ¥1.1 trillion in FY 2025 in the most optimistic scenario, not removing the worries about Japan’s fiscal health, which is the worst among the advanced economies.

The primary budget balance indicates the situation of financial situation of national or local governments, which explains whether the government can afford to secure necessary budget for various spendings, including social security or building infrastructure, with basic income such as taxes. The black means that the government can handle its policies without debt. The balance of national and local governments has been in the red for decades and the deficit has been appropriated by issuing governmental bonds.

 

While the government of Japan prospected last July that the balance would have ¥1.3 trillion of deficit in FY 2025. During these six months, it counted on upsurge of economic growth and cutting governmental spendings off amounting ¥1.4 trillion. On the other hand, economic policies of Fumio Kishida administration, introducing tax reduction for dealing with commodity price hike, would be causing ¥1.2 trillion of additional spendings. So, the last estimate of deficit was reduced by ¥0.2 trillion.

 

The ¥1.1 trillion of deficit in FY 2025 was estimated on an optimistic basis with 3% of nominal economic growth. The government of Japan expects that the balance will turn black with ¥3.1 trillion of surplus in FY 2026 in the scenario. According to a report of Asahi Shimbun, it was only FY 2015 when nominal growth exceeded 3% in these ten years, suggesting how that goal is not easy to achieve.

 

In the scenario of maintaining status quo, nominal economic growth is expected to be as low as 1.7% and primary budget balance will be ¥2.6 trillion of the red. The goal of turning it into the black will not be achieved by the end of FY 2033. “I am going to make the governmental finance healthier not to lose credibility on financial sustainability,” said Prime Minister Kishida in the meeting of Council on Economic and Fiscal Policy.

 

It was Jun-ichiro Koizumi administration which firstly upheld the goal of turning primary budget balance into the black by early 2010s in 2002, proposing a policy to limit annual issuance of governmental bonds at ¥30 trillion or less. The goal had been postponed to FY 2020 under the administration of Democratic Party of Japan in 2010, and to FY 2025 by Shinzo Abe administration in 2018.

 

The amount of deficit exceeds one thousand trillion yen, and no one knows how to repay it. The government of Japan keeps on telling “It’s not a big deal, because most of the creditors are the Japanese.” As Kishida noted, this is a matter of sustainability of Japan, maybe as a state.