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Wednesday, July 7, 2010
Getting serious on debt reduction
Prime Minister Naoto Kan's call for supra-partisan discussions on a consumption tax raise and the government's long-term fiscal management plan announced shortly before the G20 summit show that the Kan administration has become serious about reducing the national debt. As a deflationary trend continues, the government will face a difficult task of reducing the government's reliance on bond issuance while putting the economy on a stable recovery path.
The central government's outstanding debt is ¥862 trillion or 180 percent of the nation's gross domestic product. The corresponding figure for Greece, which has suffered a sovereign debt crisis, is between 130 percent and 140 percent. Unlike Greece, most of Japan's debt is owed to domestic investors. But Japan cannot postpone the task of restoring health to its finances. Still hasty efforts to reduce debt could stymie the economic recovery and result in shrinkage of tax revenues.
To overcome this difficulty, the Kan administration plans to invest revenues from tax increases in such areas as environment-related industries and medical and nursing care services to attain growth and create new jobs. This will not be easy. The government needs to work out detailed plans to make the endeavor successful.
The fiscal management plan calls for limiting the general account spending with debt service costs excluded to ¥71 trillion — the same level in the fiscal 2010 initial budget — in fiscal 2011, 2012 and 2013, and limiting the bond issuance in fiscal 2011 to ¥44 trillion — the same level in fiscal 2010. The plan also calls for having the primary balance budget deficit as measured as percentage of GDP by fiscal 2015 from the fiscal 2010 level and erasing it by fiscal 2020. The primary balance is the difference between revenues (excluding borrowings) and spending (excluding debt service costs).
To achieve the goal, the plan says that tax increases or spending cuts of more than ¥21.7 trillion will be needed in fiscal 2020. It is clear that the government must vigorously cut government waste and special account budgets to save money.