Japan foresees revenue shortfall in surplus target year 2021

[TOKYO] The Japanese government is on target to post a US$345 billion revenue shortfall in the fiscal year to March 2021, the target year for returning to a primary budget surplus, according to Finance Ministry forecasts.

The calculations, presented to a panel of Prime Minister Shinzo Abe's ruling party on Tuesday and seen by Reuters, underscore Abe's difficulty in reducing Japan's debt burden - the heaviest in the industrial world - despite growth policies that have boosted tax revenues.

The ministry forecasts that even with more robust annual economic growth of 3.0 per cent, general budget spending will exceed tax and other revenues by 40.8 trillion yen in the target year, widening from a 36.9 trillion yen shortfall forecast for the coming fiscal year.

Under a previous government, parties including Abe's set targets to return annual budgets to surplus in order to whittle down an accumulated public debt that is more than twice the country's gross domestic product.

As part of that fiscal-reform drive, Abe raised the national sales tax in April to 8 per cent from 5 per cent.

But the move sent the world's third-biggest economy into its sharpest recession since the global financial crisis, forcing Abe to postpone by 18 months a planned further hike to 10 per cent that was to have occurred this coming October.

Due to boost given by "Abenomics" to growth, the government is widely expected to meet its interim goal of halving the budget deficit as a proportion of GDP from 2010 levels - excluding new bond sales and debt servicing - in the fiscal year starting in April.

But the ministry's projections, to be submitted to parliament later on Tuesday, bolster the view that the final stages of budget-balancing will be much tougher. "The message behind these numbers is that we need to raise revenue and cut spending to fill the gap in our finances," said Hiroaki Muto, senior economist at Sumitomo Mitsui Asset Management Co. "It is a question of whether the government will say specifically how much pain is involved or simply try to get by with a vague promise of fiscal reform," Muto said. "I think Abe's government will choose the latter." In January of last year, the ministry forecast 2020/21 shortfalls of 42.9-45.8 trillion yen, depending on whether the government undertook spending reforms, assuming robust annual economic growth of 3 per cent.

Japan's economy shrank at an annual rate of 1.9 per cent in the three months to September, the most recent data showed, as the effect of the sales tax hike lingered.

Economists in a recent Reuters poll forecast a 0.7 per cent contraction this fiscal year, rebounding to 1.6 per cent growth next fiscal year.

Assuming 1.5 per cent annual economic growth, Tuesday's ministry calculations forecast a revenue shortfall of 42.3 billion in 2020/21.

REUTERS