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Thursday, July 2, 2009

Cabinet OKs record-high budget cap; poll outcome will decide fate


Staff writer

Prime Minister Taro Aso's Cabinet on Wednesday endorsed a record-high ¥52.7 trillion spending cap for the fiscal 2010 budget to cover rising social security costs, but its implementation could depend on the outcome of a Lower House poll expected soon.

The budget ceiling marks a departure from the fiscal belt-tightening introduced by former Prime Minister Junichiro Koizumi and continued by his successor, Shinzo Abe, and Abe's, Yasuo Fukuda.

Some economists were quick to call the budgetary cap yet another "spending spree" by Aso to woo voters ahead of an election in which the Liberal Democratic Party-New Komeito ruling bloc is widely seen as fighting a losing battle against the Democratic Party of Japan.

The spending cap will serve as the basis for budgetary requests from ministries and agencies near summer's end, although the fluid political situation could easily affect the budget-making process.

The DPJ has already promised to undo next year's budget by the ruling bloc if it wins a majority with other opposition parties in the Lower House poll that must be held by fall.

The draft budget guidelines endorsed last month stipulated the government would not cut automatic growth in social security spending in fiscal 2010. Based on that, Wednesday's final guidelines specified that the new spending cap will jump by ¥940 billion from the current year's initial budget and accommodate a ¥1.09 trillion increase in pensions and medical expenditures.

While continuing efforts to cut spending in public works projects, the government said it has set aside ¥350 billion in special reserves to fund priority measures to drag the economy out of recession and realize a "safe society."

Some economists suggested the government endorsed the record-high spending cap because of the looming election, widely predicted to be held in early or late August. They said they were concerned that the spending spree would burden people and hamper future economic growth.

"The ceiling is getting higher and higher," said Hiroaki Muto, senior economist at Sumitomo Mitsui Asset Management Co. "Fiscal structural reforms have certainly been put off while the ruling bloc is in election mode."

Even though the government said it will continue to slash expenditures in public works projects, Muto noted it can revive some of the canceled spending in special reserves.

Koichi Haji, chief economist at NLI Research Institute, agreed. "We are witnessing an unprecedented scale of spending," he said. "There is concern over future fiscal discipline."

DPJ President Yukio Hatoyama indicated his party may revise Aso's spending cap if it takes the helm of government in the upcoming election.

"Talking about the budget compilation for fiscal 2010, we will certainly have to redraw it," Hatoyama told reporters Tuesday. "We have not decided at this point whether to draw it up from scratch or only amend necessary parts."

Regardless of which camp prevails in the election, however, the government's spending spree will likely continue, Muto predicted.

He suggested the budget should help stimulate private demand and policies including deregulation should be initiated to spur productivity in agriculture and education.


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