Japan government eyes record budget spending, fiscal reform in doubt

TOKYO (Reuters) - Budget requests from Japan’s ministries have hit a record amount for the next fiscal year starting in April, the finance ministry said, highlighting the conflicting need to promote fiscal reform while propping up a flagging economy facing external risks.

Fiscal reform is an urgent task for Japan, which is saddled with the industrial world’s heaviest public debt at more than twice the size of its $5 trillion economy.

However, Prime Minister Shinzo Abe’s government has loosened its grip on fiscal spending as the central bank’s easy money policy effectively helps finance a massive debt.

The general-account spending requests for fiscal 2020 totaled a record 105 trillion yen ($996.30 billion), exceeding the previous high of 102.8 trillion yen sought for the current fiscal year.

The rise was due to bulging welfare costs to support the aging population, spending to service debt, and rising military outlays in response to China’s growing military presence and North Korea’s missile program.

“To sustain public finances for the next generation, we need to manage both economic revival and fiscal reform,” Kenichiro Ueno, a state minister of finance told reporters.

“We will do the utmost to scrutinize the budget requests so as not to be criticized as loosening fiscal discipline.”

The finance ministry will examine the requests and finalize the size of spending in December when it drafts the budget for fiscal 2020.

Abe’s government is set to proceed with a twice-delayed nationwide sales tax hike to 10% from 8% next month to pay for the cost of social welfare and fix tattered public finances. The last tax hike in 2014 hit consumers hard and caused deep downturn.

The initial budget for the current fiscal year amounts to 101.5 trillion yen, with social security and debt-servicing accounting for more than half the overall spending plan.

The finance ministry is seeking 24.97 trillion yen to pay for debt-servicing costs for fiscal 2020.

The Ministry of Defence called for spending to rise 1.2% to a record 5.32 trillion yen for fiscal 2020 to pay for U.S.-made interceptor missiles, stealth fighters, and other equipment it wants to counter threats from North Korea and China.

Reporting by Tetsushi Kajimoto; Editing by Chang-Ran Kim & Kim Coghill