Japan to backtrack on budget target, welfare reform as tax hike looms

Tokyo

JAPAN will delay its time frame for a balanced budget by five years to 2025, government and ruling party proposals show, leaving Prime Minister Shinzo Abe room to open the fiscal spigot to ease the economic blow from a sales tax hike next year.

The government is also likely to remove a numerical cap it had set in the past three years on social welfare spending, the proposals show.

The moves underscore the challenge Japan faces in fixing its tattered finances as the cost for funding a rapidly ageing population continues to grow. The delay in balancing the budget had been widely expected but the removal of the spending cap was less certain.

Mr Abe's administration is already drafting a list of steps, such as tax breaks for home purchases, to prevent the sales tax hike to 10 per cent from 8 per cent next October from cooling consumption, documents seen by Reuters showed.

Requests for such spending will be taken into account when the government compiles new fiscal guidelines in June, which could reinforce the view Mr Abe is putting fiscal reform on the back burner as he focuses more on growth than austerity.

Japan's dire fiscal outlook prompted a ruling party panel led by Fumio Kishida, the party's policy chief and a possible candidate for the prime minister position, to call for more debate not just on spending cuts but on higher taxes.

"It's hard to restore fiscal health unless Japan undergoes reform not just on spending but revenues reflecting social and economic developments," the panel said in a proposal on Tuesday.

Japan had originally aimed to achieve a budget surplus in fiscal 2020. But Mr Abe shelved that deadline last year when he called a snap election with a pledge to revamp the social welfare system for all generations.

Ruling party and finance ministry panels called for setting the new deadline for achieving a surplus in the primary budget - which excludes debt servicing and new bond sales - at the fiscal year ending in March 2026 in proposals made on Wednesday.

Both panels stopped short of setting a numerical target on social welfare costs, which make up roughly 30 per cent of annual government spending. In the past three years, the government had limited annual increases in social welfare spending to 500 billion yen (S$6.1 billion).

Under the new fiscal guidelines, the government will also set an interim target to review progress in getting Japan's fiscal house in order, the Nikkei newspaper said on Wednesday.

Its interim goal, with a deadline of fiscal 2021, will aim to achieve three targets: cutting the ratio of debt to gross domestic product (GDP) to around 180 per cent, the budget deficit to 1.5 per cent of GDP, and the ratio of fiscal deficit to GDP to 3 per cent or lower, according to a draft seen by the Nikkei.

The targets would not be too ambitious and would allow Mr Abe to ramp up fiscal spending to ease the pain on the economy from the sales tax increase, the newspaper said.

Mr Abe is keen to avoid a recurrence of 2014, when a sales tax hike to 8 per cent tipped the economy into recession.

The economy shrank more than expected in the first quarter, suggesting growth has peaked after the best run of expansion in decades, but analysts believe it will regain some traction in the coming months.

Some in the administration are calling for spending of up to five trillion yen, though there is no consensus yet on the scale, government sources said.

The Bank of Japan estimates that the burden on households from next year's sales tax hike would be one-fourth that of the increase in 2014, given the smaller rate of increase and exemptions to be made for food purchases.

The International Monetary Fund has warned of the need for Japan to work out a long-term plan to get its finances in order, as the country is already saddled with the heaviest public debt among major industrialised nations. REUTERS