TOKYO: Japan will use rosier tax revenue estimates in its plan to rein in the country’s burgeoning fiscal deficit, government sources told Reuters, as it struggles to make deep spending cuts needed to hit its ambitious budget target.
Premier Shinzo Abe’s administration is working on a fiscal reform plan to meet its pledge of turning Japan’s primary budget into a surplus by fiscal 2020. The plan will be part of a broader government guideline on long-term economic policymaking due by the end of June.
In the guideline, the government is set to raise the “tax revenue elasticity rate” – or the ratio of how much tax revenues rise or fall against a change in nominal economic growth – to 1.2 or 1.3 from the current level around 1.0 percent, government and ruling party officials said.
A higher elasticity rate means a country can expect to reap higher tax revenues and makes more progress in restoring its fiscal health from an expansion of economic growth.
Setting a higher rate thus meshes with Abe’s preference to rely on boosting economic growth, rather than on deep spending cuts or tax increases, in restoring Japan’s tattered finances.
“Tax revenues have recently overshot the government’s conservative projections, so raising the elasticity rate to such levels seems natural,” said Hiroshi Miyazaki, senior economist at Mitsubishi UFJ Morgan Stanley Securities Japan.
“The idea also makes sense given Abe is keen on avoiding big spending cuts that could hurt the economy.” The new estimate based on the higher elasticity rate will be presented by private-sector members of a key government panel, which is debating the guidelines, at a meeting on Monday.
Proposals by private-sector members usually set the course for discussions at the panel, which gathers key economic ministers and the Bank of Japan governor. With Abe having ruled out big tax hikes, the government is seeking ways to cut costs particularly in social welfare and medical spending, which is ballooning due to a rapidly ageing population.
But progress has been slow due to heavy resistance from the medical industry and lawmakers wary of drawing complaints from pensioners in their constituencies. Japan’s debt burden, at more than twice the size of its $5 trillion economy, is the heaviest in the developed world.
