Japan Brief/FPCJ, No. 0874
December 25, 2008


Bracing for Stormy Economy, Government Drafts Largest-ever Budget for Fiscal 2009

Driven by the growing prospects of severe turbulence in the domestic economy, the government put together a largest-ever national budget for fiscal 2009 (starting April 1), amounting to 88.5 trillion yen, up nearly 5.5 trillion yen from the current fiscal year’s initial budget. The draft budget features extra expenditures aimed, among other things, at dealing with job losses and growing financial hardships at smaller enterprises, and other consequences of the deepening recession.

A cabinet meeting on December 24 decided the budget bill, which is slated to be sent to the Diet for deliberation after the turn of the year. In a press conference that followed,
Prime Minister Taro Aso described his budget bill as “a bold action-oriented budget to defend people’s daily lives”, saying “the world is on the verge of a once-in-a-century recession. Abnormal economic circumstances demand exceptional responses.” “By taking bold measures, we aim to extricate ourselves from this recession the earliest of all countries,” he declared.

Social security accounted for by far the largest segment of the budget and amounted to 24,834.4 billion yen, or nearly 30% of the entire expenditure. Next came public works investment and other infrastructure projects at 7,070.1 billion, education and science promotion at 5,310.4 billion, and defense at 4,774.1 billion yen. Debt servicing costs amounted to 20,243.7 billion, while local allocation taxes totaled 16,573.3 billion. Excluding these items, the general expenditure amounted to 51,731.0 billion yen.

Even before the emergency situation emerged from the global financial and economic crisis, political pressures for more liberal fiscal spending were mounting from ruling party members as the prospect of a general election was growing. Such pressures have drawn additional ammunition from calls for even more budgetary appropriations to meet the economic emergency.

Enbedded in the next fiscal year’s budget, combined with the supplementary budget for the current fiscal year, were emergency economic measures worth 75 trillion yen in total project scale, according to the Finance Ministry. This was a sum equivalent to 2% of Japan’s GDP and compares favorably with stimulus packages being implemented by other major advanced countries, the ministry said. Actual fiscal requirements amounted to 12 trillion, including fixed-sum benefits and tax breaks on housing loans and stock investment gains.

The budget at the same time represented acute revenue shortfalls, putting the nation under a further constraint of fiscal deficit and snowballing public debts. The budget’s dependence on bond issues went up to 37.6%, 7.1 percentage points higher from the preceding year, a development inevitable from not only increased expenditures but also slumping corporate tax revenues due to the downturn of the economy, 7 trillion yen less than the current fiscal year. (The government estimates next fiscal year’s economic growth rate at 0.0% real and 0.1% nominal, which looks overoptimistic compared with most private institutions’ forecasts anticipating growth of around minus 1%.)

New bond issues scheduled for the next fiscal year amounted to 33 trillion yen, 8 trillion yen or 1.3 times more than the preceding year. This will boost the outstanding balance of bond issues to 581 trillion yen when the fiscal year ends on March 31, 2010. The sum represents 113.9% of the country’s GDP. When combined with those of local governments, the outstanding balance of long-term public debts zooms to 804 trillion yen, or 157.5% of GDP, the worst among OECD members.

Since even increased bond issues do not suffice to meet rising expenditures, the government resorted to drawing on fund resources which usually should not be tapped —surpluses and reserves of some special accounts. Law requires such funds to be spent for the redemption of government bonds.

These developments appear to have virtually nullified the policy of spending restraint, which has been in place as a hallmark of the ruling Liberal Democratic Party’s fiscal posture, a legacy of the Koizumi government. The policy specifically called for achieving equilibrium in the primary balance (between expenditures excepting debt servicing and revenues excepting bond issues), regarded as a first step toward restoring fiscal health, by fiscal 2011, which now seems all but impossible.

Prime Minister Taro Aso, nonetheless, still refuses to publicly abandon the goal of fiscal rebuilding. In defiance of strong opposition from ruling party stalwarts, he insisted on writing into the midterm tax reform program the idea of raising the consumption tax (at 5% at present) from fiscal 2011. But it is far from certain whether that could materialize, given the stringent condition that full economic recovery from the ongoing recession must be achieved by that time.

Media Commentaries Critical
Media commentaries on the fiscal 2009 draft budget were generally harsh. They justified stepped-up fiscal spending in the midst of a deepening recession, but questioned if the bloated spending, much of which is believed to be pork barrel, taking advantage of the feeling of emergency, would serve the purpose of saving the Japanese economy from the slump and putting it back on a growth track. They also expressed the concern that fiscal discipline, temporarily put on hold, might be undermined beyond repair even after the economic recovery.

The Nikkei in its December 21 editorial said: “While it is natural that the rapid deterioration of the economy is taken heed of at this time, longer-term strategies to move out of the recession are absent from the draft budget.” “Much of it looks aimed at vote-getting rather than true economic effects.” The newspaper also argued in its December 25 editorial: “In addition to steps to deal with the ongoing crisis, measures to strengthen mid- and long-term vitality are important. The underlying weakness of growth power is responsible for Japan’s easy tumbling into a recession at the outbreak of the American financial crisis.”

The Asahi Shimbun in its December 21 editorial argued: “What is important is a long-range vision that foresees the Japanese economy five years, or ten years ahead.” “Without it, the country will be left behind in international competition in the future and destined to decline.” It went on to argue for “a Japanese version of New Deal to change the industrial structure dependent on external demand and politics that can come out only with handouts in dealing with a crisis.” In its December 25 editorial, the Asahi urged a speedy action, citing Prime Minister Aso’s determination to “lift Japan out of the recession first in the world.”

The Yomiuri Shimbun in its December 21 editorial warned that although the goal of primary balance equilibrium may be shelved for the time being, “it does not mean that the gargantuan budget deficit may be left as it is. If bond issues are a means to ride out the current situation, the goal of securing stable fiscal resources in time and tackling fiscal reconstruction should not be lost.” The Sankei Shimbun said that “at least, as a means to arrest further deterioration of government finance, ‘the medium-term program’ that will show the process of an overhaul of tax systems to be started after three years must be legislated in an articulate manner.” The Mainichi Shimbun in its December 25 editorial argued that “in order for Japan to achieve sustainable development, rebuilding of the weakened fiscal power is an urgent task” and that “a revamping of the budgetary allocation system is needed to promote reform of the economic structure essential for economic revitalization and job creation.”

(Copyright 2008 Foreign Press Center / Japan)