No Numeric Target in Budget Cut

Council of Economic and Fiscal Policy in the government of Japan released a draft of fiscal consolidation plan for the years until FY 2020. While it expected a large amount of increase in tax income, no target of cutting expenditure was indicated. Although the council upheld an intermediate target to contain the deficit in fiscal primary balance within 1% of Japan’s gross domestic products in 2018, it did not pave the way to implement Japan’s promise to the world that it would turn its fiscal primary balance to the black until 2020.

Fiscal primary balance is an index how the government is independent from debt for policy execution. In FY 2015, the deficit is amounting to ¥16.4 trillion. Based on an expectation that it would be reduced to ¥9.4 trillion in 2020 with as high growth as actual 2%, the council has been discussing how the deficit could be reduced to zero level through budget cut and further economic growth.

Nevertheless, the draft avoided including concrete target for the budget cut. Some members predicted that the deficit could be eliminated by ¥5-6 trillion with budget cut and ¥4-5 trillion with increase of tax income. But, Ministry of Finance firmly demanded that overwhelming part of the deficit needed to be eliminated by budget cut. Mixture of those two elements has been the focal point of the discussion. The draft included a phrase that Shinzo Abe administration would take further measures for cutting budget and promote reform without exception.

There is a fundamental irony in the plan. If the government reduces the expenditure for budget cut, Japanese economy, which has been dependent on active economy and monetary policy, will soon be cooled down. As long as it expects high economic growth, the government is going to be less active in cutting expenditure. Budget cut and economic growth are incompatible each other.

Cutting social security budget is the key to success. Ministry of Finance has been arguing that the growth of social security budget should be contained less than ¥500 billion every year. However, discussed idea was too poor to achieve the goal. One plan presented by Minister of Health, Labor and Welfare was to raise the coverage of generic medicines from 60% to 80% or more in 2020. Poultice and eye lotion, not different from commercial medicine, would be excluded from the medicine to which health insurance is applicable.

To make the reform workable, the government cannot escape from structural reform in medical system, which has been extraordinarily expensive. But, receiving firm political support from Japan Medical Association, one of the most powerful lobbying groups in Japan, it is unlikely that Abe administration will take serious effort on it. It is unclear, however, that the world will be confident in the fiscal reform in Japan.