The Cabinet of Prime Minister Shinzo Abe has approved a fiscal 2020 budget draft totaling a record 102.66 trillion yen (about $938 billion), far above Japan's tax revenue. The scale of Japan's state budget has been snowballing even though the government is already saddled with over a quadrillion yen in debt.
If approved by the Diet, Japan's state budget will have surpassed 100 trillion yen for two consecutive years.
In fiscal 2020, consumption tax revenue will surpass 20 trillion yen, replacing income tax as the government's largest revenue source for the first time. This is because the rate of the indirect tax, levied on virtually all goods and services, was raised to 10% from 8% this past October. Overall tax revenue is projected to surpass 63 trillion yen, exceeding the total for fiscal 2019.
Nevertheless, this tax revenue increase is not nearly sufficient to cover government spending. Considering Japan's critical fiscal situation, as much of the increased tax revenue as possible should be used to pay down the national debt. However, the government has chosen instead to use the increase to boost its outlays, meaning Japan is relying on state bond issues for at least 30% of its budget.
The main cause of the expansion of government spending is social security costs, which will hit 35 trillion yen in fiscal 2020 -- the highest in history. In addition to snowballing medical and other expenses due to the aging of the population, the cost of making preschool and higher education free, a key Abe government policy, has sharply increased public spending.
Improving countermeasures against the declining birthrate is an urgent task for the government. However, the move to make preschool and higher education free are to be financed with the higher consumption tax revenue. If the government increases spending on various policy measures, state finances could collapse. And yet, the government stopped short of drastically reforming its social security spending, which focuses excessively on services for the elderly.
A massive amount of taxpayer money will also be spent on economic stimulus measures. A total of 1.8 trillion yen will be earmarked from the fiscal 2020 budget to finance points-based shopping rewards on cashless transactions for those who have a My Number social security card. This follows 2 trillion yen allocated to a similar policy measure in the current fiscal year. The government will furthermore use close to 7 trillion yen to fund public works projects, including those aimed at boosting the economy.
However, the government has maintained its view that the economy is gradually recovering even after the consumption tax hike. If so, such a large-scale economic stimulus package should be unnecessary.
The consumption tax hike was originally aimed at lessening the burden of state debt passed on to future generations. Now that taxpayers are required to shoulder an extra financial load, the government should show a clear roadmap for the rehabilitation of Japan's red ink-drenched state finances.
Year after year, the Abe administration has drafted big-spending budgets on the assumption that Japan's tax revenue will increase through rapid economic growth. This fiscal year, however, a corporate tax revenue shortfall has forced the government to issue additional deficit-covering bonds worth over 2 trillion yen. Even though this has highlighted the need to trim outlays, the government has failed to do so. This will only increase the financial burden on future generations.
The task that should be tackled by the Abe government, which has been in power for seven years, is to reform state finances to respond to changes in Japan's social structure, headlined by the aging and shrinking population. It would be extremely irresponsible for the government to leave the working generations of tomorrow with mountains upon mountains of debt.