Targeting Social Security

Prime Minister Shinzo Abe ordered Council on Economy and Fiscal Policy to make a plan for fiscal soundness by the end of next month. The council is going to set an interim target for reducing the deficit of fiscal primary balance lower than 1% of gross domestic project in 2018, which they hope to help ultimately balance it in 2020. Everyone agrees that key to success is how much national spending for social security can be cut.

The basic plan of the council named three years from 2016 to 2018 “concentrated reform period,” during which deficit of primary balance would be reduced from 3.3% to 1%. While it already counted on great amount of income by raising consumption tax rate from 8% to 10% in April 2017, no further hike of the tax could not be expected, because it would be unlikely in terms of impact of on people’s life. Even with new tax rate, annual fiscal deficit in 2020 is calculated to be ¥9.4 trillion.

Cutting expenditure therefore is definitely needed to achieve the goal. Cutting budget for social security, which is assumed to be increasing ¥1 trillion every year, is regarded to be crucial in the discussion of economists. The council made a point that reducing medical cost by systemic reform of medical service, including further introduction of generic medicine, will help national fiscal policy.

That’s it, so far. Politicians are skeptical in reducing financial medical support for aged people. A committee on this issue in Liberal Democratic Party did not set actual goal for degrading social security, because the policy directly connects to their election. In this crucial time for Japan’s credibility in world economy, the lawmakers with the party still insist on obtaining great share for infrastructure construction budget, which limit for fiscal improvement is obvious.

Basic scenario of the council is that Japanese economy will see 2% of real growth and 3% of nominal growth in GDP coming years. Over ¥9 trillion of deficit is supposed to be offset by further growth in the future. No evidence supports that optimistic scenario. It is likely that further consumption tax hike will not only bring additional income, but will discourage people’s consumption to the extent Japanese economy will suffer from its negative impact.

Abe administration is chasing three rabbits at one time: economic revitalization, international credit on Japan’s fiscal structure and maintaining political popularity for LDP with obsolete stimulus policies. No one around him accuses his unusual optimism.