Japan's fiscal health is being neglected by its political parties as the issue of how extra revenue from a planned consumption tax hike in October 2019 should be used -- and even if the tax rate should remain frozen -- has emerged as a major point of contention in the upcoming House of Representatives election.
Notably, none of the parties has set out a clear method of achieving fiscal rehabilitation, and it appears that the pace of repaying the national debt is in danger of slowing.
When Prime Minister Shinzo Abe returned to power in late 2012, his administration put forward the goals of "economic growth and achievement of fiscal health." It was intended that economic expansion would yield increased tax revenue, which could in part be ploughed back into the economy through greater government spending, boosting growth yet further. The objective was to bring the country's primary balance into surplus by fiscal 2020.
However, with a declining birthrate and an aging population, social security costs including medical coverage and pensions, have risen each year. In addition, owing to factors such as supplementary budgets that tacked on higher spending, the restoration of Japan's fiscal health has not proceeded as planned. Total accumulative long-term debt owed by central and local governments topped 1 quadrillion yen ($8.9 trillion) as of the end of fiscal 2016. Even if economic growth is achieved, the fiscal 2020 primary balance is projected to be 8.2 trillion yen in the red.
Initially, the idea to raise the consumption tax from the current 8 percent to 10 percent was agreed on by the precursor to the Democratic Party (DP), the Liberal Democratic Party (LDP) and Komeito in 2012, with the aim of securing necessary funds for swelling social security costs. Furthermore, the way in which the increased tax revenue would be used was also made clear, with about 4 trillion yen of the expected 5.6 trillion yen in new revenue slated for debt repayment.
However, these plans are now being changed by Abe, with about 1.7 trillion yen to be shifted from debt repayments to goals including making preschool education free of charge. It has been suggested that this figure will rise to about 2 trillion yen, supplemented from sources other than the consumption tax hike. However, this policy would leave less money for paying off the national debt, and thus worsen Japan's public finances.
Regarding getting the primary balance into the black by fiscal 2020, Abe has stated that "achieving this aim has now become difficult," suggesting that he has deferred this objective. He has yet to present a clear plan to restore fiscal health.
Meanwhile, Tokyo Gov. Yuriko Koike's new Kibo no To (Party of Hope) has stated that it wants to freeze the consumption tax rate at 8 percent, which is an even more backward-looking approach -- in terms of fiscal rehabilitation -- than the LDP. In the case of Koike, it is possible that she would also increase public expenditures to stimulate the economy, considering her comment, "I can't really sense any signs of economic recovery."
Dai-ichi Life Research Inc. economist Hideo Kumano points out, "If spending goes up to make preschool education free, or the consumption tax rate is frozen, in the end the fiscal burden will be passed on to the next generation. If there is no clear explanation on how to restore fiscal health, fiscal discipline could become increasingly slack."