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Mar. 10, 2015 - Updated 04:16 UTC



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Fiscal Reform

Jun. 30, 2015

The Greek crisis began when the country hid how much it owed, which was above the permitted level to join the Eurozone. Turning to Japan, it has the world’s highest debt-to-GDP ratio. Our focus today is Japan’s deficit. The government presented a policy for fiscal reform today. Yuko Fukushima joins us with the details.

Beppu: So Yuko, exactly, how bad are Japan’s finances compared to other countries?

Fukushima: Greece’s debt is 1.8 times its GDP. Britain’s is about the same as its own GDP. The Cameron government is trying to cut spending and restructure the country’s finances by reducing public services. That’s provoked a harsh response from people.

In Japan, the debt is more than twice its GDP. To tackle it, the government compiled a fiscal strategy to get its primary balance back in the black by 2020. That means to do away with the deficit by matching a year’s income and spending. Abe’s cabinet approved the plan today.

Cabinet members worked with scholars and the private sector to create the policy. The main concept is based around Prime Minister Shinzo Abe’s basic philosophy: “No fiscal reform without economic recovery.”

There are 5 years before 2020. The group says the first 3 years should involve reforms focused on economic growth. They say the next 2 years should be used to reduce government spending.

These moves aim at maintaining the economic growth rate of 2 percent. This is projected to bring in more tax revenue and enable fiscal reform.

Japanese Economic Revitalization Minister Akira Amari says tax revenue will increase when the scale of the economy grows. He says fixing the scale of government spending will restrict economic growth in a number of ways.

However, even from the ruling party, some policymakers expressed concerns that the idea was too optimistic. Liberal Democractic Party policy chief Tomomi Inada said a rain dance for economic growth is uncertain to succeed, and much less certain to bring the primary balance back into the black.

Inada and her colleagues wanted a limit on annual government spending, and that recommendations on this be included in the policy.

Abe made a conclusion to focus on greater tax revenues through economic growth. This is projected to reduce the current budget deficit of about 3.3 percent of the GDP to 1 percent by 2018. But he still set a limit of 1.6 trillion yen on extra government spending for the next 3 years.

Beppu: I understand that if the government is able to achieve high economic growth, it can expect more tax revenue. But Japan’s population is declining and graying, and many economists project the growth rate to be under 1%. Can the country really continue to grow at a rate of 2%? That seems to be pretty ambitious.

Fukushima: You’re not alone in thinking that. I spoke with 2 economists on whether this fiscal strategy is viable based on the growth rate projection. One of them was Motoshige Ito. He’s an advisor to Prime Minister Abe in compiling the strategy.

Motoshige Ito says abenomics changed the structure of the economy from one of deflation to that of growth. So he says the plan’s assumption of a 2% real growth rate is realistic. The University of Tokyo professor is confident the government can balance the budget by 2020.

Ito says the potential growth rate may increase, so it may be too early to stop having ambitious targets. He also points out that tax revenue is increasing, because the economy is in a recovery process. He says what’s going on is that the growth rate of tax revenue is actually higher than the growth rate of economic activities. He explains that this is a very typical phenomenon when the economy is recovering from deflation.

But Takatoshi Ito, Professor at Columbia University, is not so sure Japan will be able to achieve high growth based on the government’s strategy, which the fiscal plan is based on.

He says there were lots of good ideas in the growth strategy this year and in the past few years, and a lot of targets with specific numbers. But he thinks the way to achieve those good ideas is still missing. He says concrete plans and tools are needed, and they’re not in the plan.

The Columbia University professor also says the growth strategy is not enough to get Japan’s finances back in the black. He says there should be a cap on expenditure and increases in tax revenue. Prime Minister Abe says he will only raise taxes one more time before 2020. That’s the sales tax hike to 10% in 2017.

Takatoshi Ito says he thinks achieving primary balance by 2020 is the minimum step that must be taken, but it’s not sufficient. He says that sooner or later, Japan will have to increase its consumption tax beyond 10% if it wants to keep good welfare and education and other infrastructures in place.

Beppu: The fiscal plan that was approved today is apparently raising skepticism from some economists and lawmakers in the ruling party.

Fukushima: Yes. Even Policy advisor Motoshige Ito says economic growth won’t be enough, and he’s saying there will be no fiscal reform without economic growth .The professor says the government needs to control the expansion of spending to restore Japan’s fiscal health. Whichever path the government takes, people around the world are watching to see if Japan can meet the target of balancing the budget by the year 2020. That’s just the start to reducing the world’s largest national debt.