TOKYO: Japan's government approved a $1.16 trillion draft budget on Saturday for the fiscal year from next April, relying on accounting sleights of hand -- including as-yet unapproved tax hikes -- to meet its borrowing and spending limits as it struggles to find the political will to shore up its finances.
New borrowing from the market was held to this year's 44.2 trillion yen ($565 billion) as pledged, but only by excluding 2.6 trillion yen in "special purpose bonds" that will be taken up by Japan's public pension fund and repaid by future tax increases.
The fractious ruling party, however, has yet to reach a consensus on raising the politically unpopular sales tax, as prescribed by economists and policymakers to rein in a debt that is twice the size of the $5 trillion economy -- the worst among industrialised nations.
General spending was also trimmed for the first time in six years, but only after separating out spending on reconstruction from the March earthquake and tsunami into a different account. Analysts see the overall budget as expansionary compared with other industrial nations.
The borrowing cap also will not keep the government's huge debt pile from growing, although it has the luxury of being able to finance nearly all of its fiscal deficit at home and has so far avoided the kind of funding strains plaguing the euro zone.
Highlighting Japan's runaway debt, tax revenue is estimated at 42.3 trillion yen, little changed from the current fiscal year and below new bond issuance for the fourth year in a row, making up less than half the general-account budget.
Within the 90.3 trillion yen budget, general spending excluding debt servicing was 68.4 trillion yen, below the government's self-imposed cap at this year's 71 trillion yen, with the special-purpose bond issuance also serving to put some public pension expenses outside the general account.
SALES TAX HIKES
Without the 2.6 trillion yen in special-purpose bonds, which do not count as issuance to the market, the government would have missed its goal to keep new bond issuance at this year's levels.
"Rather than patching up numbers to ostensibly meet targets, what's more important is for the government to show exactly how it can maintain fiscal discipline in the medium term," said Takahide Kiuchi, chief economist at Nomura Securities.
"The financial markets will react negatively if the debate on sales tax hikes hits a snag, preventing the government from proceeding with fiscal reform."
Japan aims to bring the primary budget balance, which excludes borrowing and debt service, into the black by 2020/21.
This can only be achieved with substantial spending cuts and tax hikes. The government also intends to make up a shortfall in public pension funding by raising the sales tax.
But Prime Minister Yoshihiko Noda is struggling to win support for sales tax hikes among his party's lawmakers, many of whom are wary of a voter backlash against a plan to double the politically sensitive 5 percent tax by mid-decade.
The government also is likely to face an uphill battle to obtain parliamentary approval for the budget and bills related to sales tax hikes, with combative opposition parties controlling the upper house and holding the power to block enabling bills.
RECONSTRUCTION BUDGET
The government plans to spend 3.3 trillion yen on post-quake reconstrution in a newly launched special account worth 3.8 trillion yen that is excluded from general spending.
That comes on top of about 15 trillion yen earmarked this fiscal year for rebuilding northeast coastal areas devastated by the March disaster, bringing reconstruction spending in just two years almost to the 19 trillion yen target the government set for the initial five years.
With Japan's population ageing, social security spending hit 26.4 trillion yen, about one-third of the budget and accounting for the lion's share of general spending.
Public works spending was cut 8.1 percent to 4.6 trillion yen for 2012/13, one-third of the peak of 15 trillion yen hit in the late 1990s, reflecting a shift away from big construction projects seen as less effective in stimulating the economy.
Despite low borrowing rates, the bulging debt has pushed up debt-servicing costs -- interest payments and redemption -- to 22 trillion yen, or a quarter of the general-account budget, squeezing out other spending.
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