Archive | March 2018

Japan’s budget deficit is not disappearing yet

Although Prime Minister Abe had pledged to achieve a budget surplus (government expenditures less than tax revenues or G<T) by 2020, it seems very unlikely that it will happen.

Last Wednesday, the Diet enacted the budget for fiscal year 2018 (April 1st to March 31st 2019) in which government expenditures total 97.71 trillion yen ($926 billion), a record-high amount for the sixth straight year.  Expenditures keep rising to cope with the aging population (social security spending includes pensions and medical costs) and to provide for increased spending on defence, in response to North Korea’s threats.  The government is also expanding child-care support and free education to invest in human capital.

Tax revenues (estimated at 59.08 trillion yen) will only cover about two-thirds of the 97.71 trillion yen, even though taxes on smoking will rise (not at all controversial, even though they will impact lower-income earners relatively more) and income taxes for those earning over 8.5 million yen a year will rise a little, making the tax system slightly more progressive.

The other third will be financed by borrowing, namely by issuing government bonds worth 33.69 trillion yen.  Does this matter? It does add to the national debt which, at 253% of GDP, is the largest in the world. https://tradingeconomics.com/japan/government-debt-to-gdp

The debt has to be financed continuously, both to redeem bonds that are due for repayment and to pay the interest on the bonds. Consequently, debt-servicing costs for this budget are 23.30 trillion yen, about a quarter of total spending. However, Japan can relatively easily pay these costs because interest rates are still remarkably low and because most of the debt is held by Japanese funds and citizens.

If Japan were to slash government spending in order to balance the budget (G=T), there would undoubtedly be a recession (aggregate demand shifting left dramatically) because both consumption and investment are too low to stimulate the economy. And overseas countries would not tolerate Japan cutting its imports and/or boosting exports aggressively.

The government is hoping that as the economy slowly grows and incomes grow, tax revenues will grow faster (due to the progressive income taxes and corporate taxes on profits), thus “naturally” reducing the deficit.   If wages grow faster,  consumption and thus incomes would also grow more. Consequently the government is encouraging firms to raise wages by 3 percent or more this year. Any firm that does so can pay less in corporate tax. Extra investment will also earn a tax credit.

Therefore, so long as people and financiers are still willing to lend to the Japanese government (and they are!), the present size of the budget deficit does not seem to be a problem. But maybe some commentators would disagree with me.

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