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Friday, Aug. 7, 2009
Big promises, but where's the funds?
DPJ vows cuts in other areas; LDP stresses overall growth
Second in a series
A monthly allowance of ¥26,000 for every child of junior high school age and under, free rides on highways and no tuition fees for high school are all goals of the Democratic Party of Japan as spelled out in its manifesto for the Aug. 30 election.
The key questions are where the party will come up with the funding to pay for this juicy lineup and whether all of its pledges are even attainable.
"It isn't that we don't have fiscal sources. We have them," DPJ President Yukio Hatoyama said when he announced the DPJ platform July 27. "First, we will thoroughly eliminate wasteful spending."
By slashing waste, the DPJ says it can come up with ¥9.1 trillion, including ¥6.1 trillion by slashing projects carried out by the government-affiliated organizations where retired bureaucrats often end up, as well as other ministry spending. It also vows to utilize ¥4.3 trillion in reserves set aside in special accounts.
In total, the DPJ claims it can come up with ¥16.8 trillion by the end of fiscal 2013.
But Masaaki Suzuki, senior economist at Mizuho Research Institute, doubts the DPJ can fulfill its goal.
"It is a good direction itself that the fiscal resources will be generated by eliminating wasteful spending," Suzuki said, also praising the DPJ's efforts to specify clear targets for spending cuts.
"But since the scale is so big, I wonder whether it will be feasible just by restructuring the government," Suzuki said, referring in particular to shaving ¥6.1 trillion in government expenditures.
The DPJ's big plans for lavishing funds on its own agenda, on the other hand, raises concerns that the national debt — already at 170 percent of gross domestic product — will mushroom further and leave it to future generations to foot the bill.
The party has said it won't rule out the possibility of resorting to a tactic to which its arch foe, the Liberal Democratic Party, is no stranger to, and this is issuing deficit-covering bonds if its efforts to find funding fall short.
"If policies are to be implemented to seriously consider our children's future, it is important not to increase public debt any further," said Ryutaro Kono, chief economist at BNP Paribas. "If public debt again increases, (policy) options will be really limited in our children's era."
The LDP meanwhile has vowed to secure funds by revitalizing the economy so tax revenues will go up. Unlike the DPJ, it has set a goal of achieving annualized economic growth of 2 percent in the latter half of fiscal 2010.
With this in mind, the LDP is promising to boost domestic demand by ¥40 trillion to ¥60 trillion in the next three years, which would translate into some 2 million new jobs.
The party is also vowing to increase annual household disposable income by ¥1 million within a decade and raise per capita income to the world's top tier.
"Until now, I have made the economy my priority in carrying out policies," Prime Minister Taro Aso said last week when he unveiled the LDP's platform, adding that financial resources will be procured through economic growth.
But Takuji Aida, senior economist at UBS Securities Japan, said the LDP still needs to offer more details on where it will get the money to implement its policy platform.
On achieving its target for economic growth, Aida said the LDP needs to clarify how much the budget will have to grow and how much will have to be raised through deficit-covering bonds.
To boost revenues, raising the 5 percent consumption tax may be the only logical option. But both the LDP and DPJ are reluctant to specify before the election when they would raise the tax.
"After the economy recovers, I will ask for a comprehensive tax reform, including raising the consumption tax, to allocate funding to social welfare and to tackling the low birthrate," Aso said.
The LDP plans to draft the necessary legislation for tax reform by fiscal 2011 and implement it immediately after the economy recovers.
The DPJ meanwhile says it won't raise the current 5 percent levy in the next four years.
Regardless of which party will take the lead role in the government after the Aug. 30 poll, economists are skeptical there will be a quick cure for the ailing economy.
No matter what kind of policies are introduced, Japan's economic recovery will be contingent on a recovery in the United States, where the global economic crisis started, and Japan's low birthrate and graying population will not change dramatically, said Yasunari Ueno, chief market economist at Mizuho Securities Co.
"There will not be any major change" to the economy even if the measures in parties' campaign pledges are carried out, Ueno said.
Other economists agree. They say the public is looking for a clear vision on how the government will handle Japan's worrying demographic problems and boost demand in the long term.
If the population fails to grow, which would translate into a bigger labor force and taxpayer base, the government will have to promote tourism, immigration and foreign investment to spur demand, they said. These measures will eventually help Japan rebuild fiscal health.
"Both the DPJ and LDP lack long-term growth strategies," Aida of UBS Securities said. "I still cannot harbor any expectations that the potential growth rate will fundamentally change, or be boosted, by this election result or the policies to be implemented."
In this series, we take a close look at possible changes under a DPJ-led government and compare them with current policies under LDP rule.
Competing economic policies
LDP: Achieve annualized economic growth of 2 percent in the second half of fiscal 2010. DPJ: Lower corporate tax rate for small firms from 18 percent to 11 percent.
LDP: Implement job training for 1 million people in three years. DPJ: Provide job training with a monthly allowance of ¥100,000.
Education and child-rearing
LDP: Make infant education free and create scholarships with stipends for high school and university students. DPJ: Distribute a monthly allowance of ¥26,000 for junior high students and below and make public high school free.
Sales tax hike and fiscal resources
LDP: Complete legislative action for tax reform by fiscal 2011 and hike the consumption tax once the economy recovers. DPJ: Don't touch the consumption tax for four years and create fiscal resources by eliminating waste and revamping the budget.
Target time to achieve a primary budget surplus
LDP: By fiscal 2019. DPJ: Not specified.