FOCUS: Impediments Mount to Japan’s Fiscal Consolidation

Tokyo, Sept. 26 (Jiji Press)–Japan’s government debt has reached a critical level after years of rising expenditures, while efforts to restore fiscal discipline are facing growing headwinds. The combined balance of outstanding national and local government debt now exceeds 200 percent of gross domestic product, a level that stands out among major economies. Despite calls for reform for both spending and revenue, an aging population and rising prices are accelerating the growth of social security costs. At the same time, with households strained by higher living expenses, public frustration has mounted, giving added momentum to opposition parties’ demands for tax cuts. Japan’s national and local governments have run a combined primary budget deficit since 1992. This means that policy expenditures such as social security and public works cannot be covered by tax and other revenues alone, leading to borrowing. In estimates released last July, however, expenditure reforms and stronger tax revenues, driven mainly by robust corporate earnings, brought the goal of a surplus in fiscal 2025 into view. Still, the fiscal 2024 supplementary budget, which primarily funded benefits for low-income households and subsidies to cover rising utility costs, totaled 13,943.3 billion yen, far above the extra budget levels before the COVID-19 pandemic. Furthermore, spending pressures have intensified since the October 2024 House of Representatives election, in which the ruling Liberal Democratic Party-Komeito coalition lost its majority in the powerful lower chamber of parliament, and had to seek opposition cooperation to pass legislation, including budgets. In January, after the fiscal 2025 budget realized the Democratic Party for the People’s proposal to raise the so-called 1.03-million-yen annual income threshold, above which income tax is imposed, the government revised its fiscal 2025 primary budget balance outlook to a deficit. In the annual basic policy on economic and fiscal management adopted by the cabinet in June, the government set the expected date for achieving a primary budget surplus between fiscal 2025 and fiscal 2026. The latest estimates released in August still projected a deficit of around 3.2 trillion yen for fiscal 2025, with a surplus of roughly 3.6 trillion yen forecast for fiscal 2026. With prices elevated for an extended period, easing burdens on households became a central issue in the July election for the House of Councillors, the upper chamber. All opposition parties campaigned on reducing or abolishing consumption tax. Outgoing Prime Minister Shigeru Ishiba has warned against tax cuts, saying that “we must not do anything that would damage” consumption tax, which underpins social security financing. Nevertheless, his governing coalition suffered a crushing defeat and lost its majority in the Upper House as well. In the wake of the elections, the opposition camp has stepped up its demands for measures that would require higher government spending, including tax cuts, free high school education and the elimination of provisional gasoline tax surcharges. At the same time, the government plans to reflect rising personnel costs and higher prices in the fiscal 2026 budget, raising concerns that overall expenditures will grow at an accelerated pace. Spending on social security benefits, such as pensions, medical care and nursing care, swelled to about 140.7 trillion yen in fiscal 2025 on an initial budget basis, up from 78.4 trillion yen in fiscal 2000. Of the total, 38.3 trillion yen comes from the national general account, straining public finances. Consumption tax revenue, which is legally earmarked for social security, is projected at 24.9 trillion yen. The resulting shortfall in general-account outlays is routinely covered by deficit-financing bonds, a funding pattern that has effectively become the norm. According to estimates published in fiscal 2018, social security benefit expenditures are projected to reach about 190 trillion yen in fiscal 2040, underscoring the urgent need to review and reform the social security system. Achieving sustainable public finances requires reforms on both spending and revenue. Yet in the political arena, short-term relief for voters continues to take precedence. “Fiscal consolidation is difficult to promote without public understanding and support,” Takayuki Sueyoshi, chief researcher at Daiwa Institute of Research Ltd. said. “It’s important to make financial flows and the system as transparent as possible, and to communicate with the public in clear, accessible terms.” END [Copyright The Jiji Press, Ltd.]