TOKYO, Dec 24 (Reuters) - Japan’s government approved a 90.3 trillion yen ($1.16 trillion) draft budget for the year from next April that resorted to “special” bonds and accounts to achieve its targets, underscoring its struggle to impose fiscal discipline while paying for post-quake reconstruction and swelling welfare costs.
The government will issue special-purpose bonds, to be repaid by future tax rises and thus not counting as new issuance, to meet a self-imposed cap on new borrowing.
Although Japan’s public debt is already twice the size of the $5 trillion economy, the government has had little success in restraining spending, due to the rising costs of caring for a rapidly ageing society.
It also has yet to achieve a consensus on much needed tax hikes in a split parliament.
Following are details of key budget items for 2012/13 and how the government proposes to fund them.
The government plans to spend 3.3 trillion yen on rebuilding northeast coastal regions devastated by the March 11 earthquake and tsunami. That amount will be set aside in a special account, excluded from the general account budget, allowing the government to achieve a cut in general spending for the first time in six years.
The reconstruction spending comes on top of nearly 15 trillion yen the government allocated in three emergency budgets in the current year, making it likely the government will end up exceeding its target of 19 trillion yen in reconstruction spending over five years.
The extra budgets are forecast to boost gross domestic product (GDP) by a cumulative 2.6 percent, providing the basis for the government’s projection of 2.2 percent growth in the world’s third-largest economy in 2012/13.
The government will issue reconstruction bonds, a type of special-purpose bond that does not count as new issuance, to fund the spending. They are to be repaid over 25 years through increases in the income tax and corporate tax.
The government plans to spend 26.4 trillion yen on welfare, down 8.1 percent from this year but accounting for 30 percent of the budget.
The government is issuing special-purpose bonds worth 2.6 trillion yen to meet the state’s 50 percent contribution to pension payments, which will therefore be excluded from the general account.
Otherwise, social security spending remains on an uptrend and is expected to rise at a rate of 1 trillion yen annually in the future.
Although the bonds are designed to be repaid by future tax hikes, the government is having difficulty getting lawmakers to commit to supporting an unpopular plan to double the 5 percent sales tax by mid-decade.
The government plans to cut spending on bridges, roads and infrastructure by 8.1 percent in the general account, although such spending actually increases by 6.6 percent if the special account for reconstruction is included.
That spending is still only one-third of the peak of 15 trillion yen hit in the late 1990s due to a shift away from reliance on large-scale public works to spur economic growth.
The government plans to double to 4 trillion yen its credit guarantees for a newly established public entity that is helping Tokyo Electric Power Co compensate those affected by the nuclear crisis at the Fukushima Daiichi nuclear plant.
The state-backed Nuclear Damage Liability Facilitation Fund can also ask the government to issue special-purpose bonds worth up to 5 trillion yen for additional funding.
The government has expanded its war chest for currency market intervention twice this fiscal year, by a total of 45 trillion yen, after spending 13.6 trillion yen on intervention during the year to combat the yen’s rise to record highs.
The borrowing limit for currency intervention in the foreign exchange special account now stands at 195 trillion yen. The authorities had used 127 trillion yen as of the end of November, leaving 68 trillion yen still available.
The government technically kept new borrowing at 44 trillion yen and trimmed general sending to 68 trilion yen from this year’s 71 trillion yen.
Reliance on debt hit a record high of 49 percent while tax revenues are seen falling short of new bond issuance for a fourth straight year. The ratio would be even higher if special bonds were included.
Outstanding debt is projected to reach 937 trillion yen including local government debt at the end of March 2013, or 195 percent of GDP, compared with 192 percent expected at end-March 2012, with the borrowing limit only helping to slow the pace of the increase in debt. The debt-GDP ratio as calculated by the OECD is higher at 219.1 percent in 2012, the worst among industrialised countries.
Despite low borrowing rates, the bulging debt has pushed up debt-servicing costs to 22 trillion yen, accounting for one-quarter of the general-account budget, squeezing out other spending.
The primary budget deficit, which excludes debt servicing, is 22.3 trillion yen, little changed from the current year’s initial budget.
The government aims to bring the primary balance into the black by 2020/21, an achievement unseen in Japan for two decades. This will only be attainable with substantial spending cuts and tax hikes.
Tax revenues are seen rising to 42.3 trillion yen but there is no change in the general downtrend in Japan’s tax-to-GDP ratio, which has fallen to 17 percent, the lowest among industrial nations.
Moody’s Investors Service, Standard and Poor’s and Fitch all rate Japan’s sovereign debt at AA minus. Moody’s cut its rating in August of this year while S&P and Fitch lowered their outlook to negative months after the March disaster.
Japanese rating agency Rating and Investment Information Inc stripped Japan of its AAA rating on Dec. 21, the first rating downgrade by a domestic agency.