Optimistic Estimation on Primary Balance

The Cabinet Office released its estimation that the primary budget balance (PB) would see surplus in FY 2025. The reason is very simple. It was because the government could expect a greater tax revenue than previous years, which would be brought by inflation of commodity prices and wages. It is likely that the estimate will be turning to the red again when the government delivers economic stimulus package in this fall. It is questionable that the government will achieve the goal. 

The PB is an index indicating how the government can secure the budget for administrative services, such as social security or building infrastructure, without relying on debts. Under the leadership of former Prime Minister Jun-ichiro Koizumi in 2001, the government of Japan set a target to turn the index to the black by 2011. The government of Japan has never reached the target so far, because it kept on issuing a large amount of Japanese government bonds (JGBs) for political reasons every year.

 

According to a document submitted to the Council on Economic and Fiscal Policy on July 29, the PB against the gross domestic product (GDP) has been improving with reform of expenditure in annual budget plan, expansion of GDP and increase of revenue by raising consumption tax rate. Although COVID-19 and price hike of crude oil had negative impact on budgetary balance between FY2020 and FY2022, the PB is going to be turning to 0.1 percent of surplus in FY2025, after gradual improvement in FY 2023 and FY2024.

 

The Cabinet Office had an estimation in January that the PB in 2025 would be negative. The office calculated it based on 2.8 percent of nominal growth both in January and in July, but the estimation of tax revenue increased by 1.6 trillion yen during these six months.

 

The calculation does not only include the cost for reconstruction from the East Japan Great Earthquake and for measures in the green transformation, but expenditure for economic stimulus measures which is expected to be delivered in this fall. The Prime Minister Fumio Kishida has already announced that. Kishida is planning to include the measures for raising birth rate in the supplemental budget this fall. If the budget exceeds 10 trillion yen, it will be difficult to keep the surplus of PB in FY 2025.

 

 

Even if the PB marks the black in FY2025, the debt will not be reduced drastically. The total amount of debt of the Japanese government exceeds 1,300 trillion, two times greater than its GDP, putting the country at the worst position in the developed countries.

 

Current change of monetary policy by the Bank of Japan may have a negative impact on the budget. The interest rate hike is going to have a negative impact on the payment of the government for its JGBs. If the businesses in Japan enters a slump with volatility of foreign exchange or stock market, the optimistic estimation of tax revenue will collapse. There is only a few optimisms about the future of budget of Japanese government.

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