The fiscal rehabilitation plan under consideration by Prime Minister Shinzo Abe's government for finalization in June provides no answers to the lingering questions of how to trim the country's quadrillion yen-plus public debt and tackle the problem of the ultra-aging society.
The previous plan had aimed to achieve a primary balance surplus by fiscal 2020, enabling the country to foot social security and other costs without relying on debt. However, Prime Minister Abe changed course last year and suggested mapping out a new plan by deferring the primary balance goal.
Abe dubbed the declining birth rate and the aging population as a "national crisis" and underlined that his administration would stick to the goal of fiscal rehabilitation. If that's the case, he ought to take responsibility to demonstrate a fiscal goal that will not hand over burdens to future generations by delaying targets as little as possible in the new plan.
Yet, the content of the fiscal rehabilitation plan currently available is fraught with problems.
First and foremost, the plan pushes back the primary balance surplus goal by five years to fiscal 2025, when all baby boomers will be aged 75 or older, snowballing social security costs. Prime Minister Abe apparently aspires to coincide state finance rehabilitation with that critical turning point.
However, the rise in social security costs will begin accelerating in 2022, three years earlier than the new target year, as baby boomers will turn 75 from that year on. Unless swelling social security spending is relieved at an early date, we would only be passing our debts down to future generations.
Furthermore, the government is also set to shelve numerical targets to curb social security costs in the new plan. While such figures were included in previous plans, the ruling parties reportedly resisted the move ahead of the House of Councillors election scheduled for summer next year. Such a change of policy could further undermine fiscal discipline and result in mere pork-barreling.
Another problem with the new plan is that it is premised on an overly optimistic prospect for Japan to enjoy even longer economic growth.
The higher the economic growth a country enjoys, the more tax revenue it can expect to gain. Prime Minister Abe has hardly tackled painful expenditure cuts, and he may well want to keep counting on Japan's economic growth.
However, a fiscal rehabilitation plan without a clear path to securing tax revenue could falter at its foundations down the road. The reason why the government has failed to achieve the goals set in previous plans is because it counted too much on high economic growth.
The government apparently lacks a sense of crisis amid the prolonged low interest policy under the Bank of Japan's quantitative and qualitative monetary easing. However, such a powerful and drastic policy could distort the economy itself. One is tempted to wonder how long the government is going to keep the ultra-easing monetary policy.
Prime Minister Abe needs to squarely face up to the serious status quo in Japan's public finances. The new fiscal plan should be one that is based on a realistic economic outlook and is aimed at curbing public expenditure in a full-scale manner.