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Saturday, Jan. 17, 2009

Budget-balancing goal pie in sky?

Political leaders' inability to address tax hike seen as delaying fiscal reform until 2011

Staff writer

Even if the economy recovers, the primary budget balance will remain in deficit for the next decade unless the consumption tax is raised incrementally beginning in fiscal 2011, the government said in a report Friday.

If the 5 percent tax is doubled over five years between fiscal 2011 and 2015 by adding 1 point every year, a surplus will finally be achieved in fiscal 2018. If it is hiked by 7 points to 12 percent in the same manner, the surplus will be achieved slightly earlier in fiscal 2017, the government estimates.

The estimate indicates the government has effectively abandoned its goal of achieving a primary budget surplus in fiscal 2011 because no consensus has been reached on when and how much to raise taxes.

The Cabinet nevertheless vowed to achieve the de facto nonbinding target.

"Under the current goal, we will further make state finances healthier while prioritizing the economic recovery," the Cabinet Office said in the report, which helps outline fiscal policy for the next 10 years.

The paper was submitted Friday to the Council on Economic and Fiscal Policy, the nation's top economic panel, and is expected to be approved by the Cabinet later this month.

The report acknowledges that the economy and tax revenues have been taking damage from the global financial crisis and recession.

"The fiscal balance has rapidly been deteriorating and it is getting difficult to achieve the goal of posting a central and regional primary budget surplus by fiscal 2011," the paper says.

The fiscal 2011 goal was introduced in 2006 by then Prime Minister Junichiro Koizumi, who was a champion of fiscal belt-tightening. His successors kept the goal intact as a cornerstone of the government's fiscal reforms.

"Even if the timing is delayed for the target to be met due to rapidly changing world economic situations, we will make finances healthy by shortening the delay as much as possible," the report says.

Given the dire state of the government's coffers, economists were not surprised by the new estimate. They instead urged the state to halt the sliding economy, stop wasting taxpayer money and set a new realistic target for achieving the surplus.

Yasunari Ueno, chief market economist at Mizuho Securities, said the latest estimate was no surprise.

"With the rapid economic deterioration and tax revenue fall, there is nothing strange (about the estimate)," Ueno said. "Such severe results are a given."

If the primary budget balance continues to stay in the red for the long term, the tax burden on individuals might get heavier in a declining population, and that could push the economy down, Ueno said.

Koichi Haji, chief economist at NLI Research Institute, said a primary budget deficit could also affect the economy in different, unexpected ways.

"The interest rate on government bonds could rise further, making it difficult for companies to borrow money and make plant and equipment investments," Haji said.

To avoid that scenario, the government should eliminate wasteful expenditures and draft policies to stimulate domestic demand, Ueno said.

Haji said achieving the original goal of a primary budget surplus is impossible, if viewed realistically.

Since hiking the sales tax is inevitable, Haji said the government should postpone its fiscal goals for a while to prioritize economic recovery.

The fiscal policy estimate couldn't have come at a worse time in political terms: a Lower House election is due in months, and the ruling Liberal Democratic Party is suffering from heavily sagging opinion poll numbers under unpopular Prime Minister Taro Aso.

The policy paper, however, is consistent with Aso's plan to raise the consumption tax in fiscal 2011, and he intends to mention those plans in a tax reform bill to be approved by the Cabinet next week.

During a meeting of the LDP Policy Research Council on Thursday, many party members protested the plan.

"I strongly disagree that we should include the 2011 consumption tax hike in the supplementary provision of the tax reform bill," Upper House member Ichita Yamamoto said after the meeting.

"In terms of economic measures, when the government is trying to stimulate domestic demand with various methods, there is no need to mention the tax hike in another scene. I think that will decelerate the economic measure," he said.

Additional reporting by Kazuaki Nagata

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