Abandoning Target of Primary Balance

Prime Minister Sanae Takaichi announced at Committee on Budget in the House of Representatives on November 7th that she would revise the target of primary balance of national budget from annual one to multiple years. It will make easier for the government to issue governmental bonds (GB), which balance is already at the worst level among developed countries. It is concerned that fiscal discipline of Japan will be further deteriorated. 

Primary balance indicates how national budget is healthy. It is drawn by deducting spendings except redemption for GB from revenue except income through issuing new GB. It means how national budget can be maintained without relying on debt.

 

It was former prime minister Jun-ichiro Koizumi, being serious about fiscal healthiness as setting limitation of issuing new GB at annual 30 trillion yen, who set the target of achieving that surplus in early 2010s in 2002. The target became FY2011 in 2006, which was not implemented with the Lehman Shock in 2008 and East Japan Great Earthquake in 2011.

 

Former prime minister Shinzo Abe reset the target at FY2020 in 2013 and postponed it to FY2025 in 2018, upholding his economic policy with large amount of spendings, called Abenomics. In the 2025 Basic Policies for Economic and Fiscal Management and Reform, the target of achieving a surplus in primary balance was set at “as early as possible between FY2025 and FY2026,” blurring the target of FY2025.

 

“Based on a concept of ‘responsible and proactive public finances,’ I will make strategic fiscal spendings, build a strong economy and raise economic growth,” said Takaichi in her discussion at the budget committee. She announced that her government would finish traditional target-setting year by year. She insisted on achieving lower ratio of mid- and long-term debt balance against GDP.

 

In an assessment of Cabinet Office in August 2024, the primary balance will achieve a 3.6 trillion yen of surplus in FY2026, if Japanese economy grows in the middle between 1 and 2 percent. However, that goal cannot be achieved, if Takaichi delivers a large size of supplemental budget in this fall. With necessity of supporting households that have been suffering from price inflation, Takaichi is planning to spend budget in her economic stimulus package.

 

When the target of achieving fiscal surplus in primary balance is tuned down, the government can issue GB to promote political agenda for a prime minister without annual checking, with reasoning that the debt would be balanced next year or later. If Takaichi issues a large amount of GB in the supplemental budget, it will mean abandoning implementation of the target of making surplus in primary balance in FY2025, set by Abe, and possibly causing further erosion of confidence on budget of Japanese government in the world.

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