TOKYO – In the government’s annual guidelines for economic and fiscal management approved by the Cabinet on July 21, what caught my attention was a shift toward budget planning based on strengthening growth and expanding the economy, as well as changes to fiscal consolidation targets.
On budgeting, it is reasonable to try to restore supplementary budgets, often used to fund stimulus packages launched almost every year, to their original purpose by limiting them to items with high urgency and importance, rather than using them as a convenient way to ratchet up policy spending.
For 17 strategic areas the government prioritizes, such as artificial intelligence and semiconductors, budgets will be allocated based on multiyear public-private investment plans to make spending trends easier to anticipate. But the investment areas are wide-ranging and there will be no cap on budget requests, meaning the government must scrutinize how funds are used to avoid indiscriminate spending or excessive expansion.
On fiscal soundness, the traditional approach was two-tiered: with the primary balance in deficit, first secure a surplus, then steadily reduce the ratio of debt to gross domestic product. With the primary balance deficit narrowing recently, the government this time positioned the debt-to-GDP ratio cut as the core target.
However, the guidelines do not specify the level of the debt-to-GDP ratio to aim for or when to achieve it, marking a sharp retreat from the previous ones which said the government would first seek to return to pre-pandemic levels by fiscal 2030. The government should quickly clarify, within the medium- to long-term economic and fiscal plan through fiscal 2040, how much it intends to lower the debt-to-GDP ratio.
The government said that it will, during the budget process, examine the fiscal scale that would allow a steady reduction in the debt-to-GDP ratio and then set a specific annual amount of government bond issuance. If fiscal scale and bond issuance are calculated on the assumption of a high nominal growth outlook, they could end up being excessive.
Funding sources are also undecided for growth investment such as AI, a consumption tax cut and fresh cash handouts the government is considering. If this leads to unchecked expansion of fiscal deficits and swelling debt, it could instead choke off growth.
Overly optimistic expectations of an economic expansion and a natural rise in tax revenue should be avoided. Based on prudent assumptions for nominal growth, the government needs to secure stable funding sources.
To secure them, beyond reviewing existing spending and special tax measures, Japan must reshape how the public shares the burden in a way suited to an aging society. It should avoid placing excessive burdens on younger generations whose share of the population is shrinking and build a system that reflects income and assets more than before so that, among older generations, those with substantial financial assets bear an appropriate share.
With Japan’s public finances in a severe state, it is crucial to continue securing market confidence in the government’s fiscal management. Working toward fiscal consolidation is the minimum form of crisis management.
If Sanae Takaichi’s government keeps upholding the banner of “responsible and proactive public finances,” what is needed above all is disciplined spending with clear priorities and fiscal rules. I hope the government will scrutinize its fiscal management in a neutral and rigorous manner by reviewing budgeting processes and reorganizing and upgrading internal government functions that assess such things as the effectiveness of growth investment and improvements to fiscal targets.
(Katsuhiro Hachiya, born in 1970, is a senior economist at the Japan Research Institute. After graduating from the University of Osaka’s School of Economics, he joined the think tank in 1992, specializing in public finance and public economics. He was formerly on loan to the Cabinet Office.)