Japan Government Borrowing Set to Soar

Japanese public finances sit uncomfortably somewhere between a rock and a very hard place indeed. This is brought home again this week by the disclosure that the Council on Economic and Fiscal Policy in its final draft of the revised Structural Reform and Medium-Term Economic and Fiscal Prospectus, prepared by the Cabinet Office, estimates that bond issuance will climb to as much as 40.2 trillion yen in fiscal 2004. This will then be followed by an issuance of 41 trillion yen in fiscal 2005, 40.3 trillion yen in fiscal 2006 and 40.8 trillion yen in fiscal 2007.

The document, to be submitted to the council Monday before being sent to the Cabinet for approval, includes two fiscal policy scenarios: one in which state coverage of the national pension costs remains at its current one-third, and another in which the government burden is increased to 50 percent. In the latter scenario, the consumption tax is increased to 6 percent from 5 percent. Even then, the additional tax revenue would not reduce the national debt, as it would be used solely to slash the growing burden of the aging society on the social security system.Though the revised version stays faithful to the original pledge to erase red ink from the primary balance by the early 2010s, it projects a slowing down of the decrease in the budget deficit as a proportion of gross domestic product.
Source: Asahi Shimbun
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It is this increase in the government tax support for the pension system from one third to one half which is provoking all the fuss about the projected rise in consumer tax which would be the knock-on effect (see Richard Katz artice HERE, since a new medium-term policy plan drawn up by the Cabinet Office includes fiscal projections that assume a consumption tax hike from 5 percent to 6 percent in October 2004. Obviously any such tax increases would make it even more difficult to escape the grip of deflation.

Some policy watchers are taking the estimates as a tacit acknowledgment by the government that a hike is inevitable. The calculations were included by Cabinet Office officials in a revised draft of the Structural Reform and Medium-Term Economic and Fiscal Prospects, considered an outline for the government's policy on midterm economic management.The document will be submitted Monday to the Council on Economic and Fiscal Policy, a key advisory panel headed by Prime Minister Junichiro Koizumi. It is expected to be approved at a Cabinet meeting this month.......... Some officials say the government has no choice except a hike if it ends up expanding state coverage of basic pensions from one-third to one-half, as planned under fiscal 2004 reforms.Observers say the projections reflect the prevailing mood in the government on a tax hike.
Source: Asahi Shimbun
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