Japan’s New Economic Plan Puts Fiscal Discipline on Back Burner

(Bloomberg) -- The Japanese Cabinet approved a new mid-term economic plan on Friday that further delays efforts to rein in debt and removes an important cap on spending.

The plan for economic policy making and fiscal management for the next three years targets a primary balance surplus by fiscal 2025, five years later than the previous goal, and drops a 500 billion yen ($4.5 billion) limit on annual increases in social spending.

Some economists have expressed concern about the removal of the spending cap while most see the delay in the primary surplus target as an acknowledgment of reality. Even under its most optimistic growth scenario, the Cabinet Office says it will take until 2027 until a surplus can be achieved.

With an aging population that requires more public spending on medical care and pensions every year, Japan is struggling to put its finances in order. It has repeatedly pushed back the key budget target, which measures the government’s fiscal position excluding interest payments on its borrowings.

"The policies for controlling social spending are vague, and the degree to which they’ll be effective is unclear," SMBC Nikko’s Yoshimasa Maruyama and Koya Miyamae wrote in a note after a draft of the plan was released earlier this month.

In addition, the government established three additional fiscal goals to achieve by the time it crafts its next mid-term plan in 2021: halving the primary balance deficit from its 2017 level, bringing debt down to 180 to 185 percent of gross domestic product and cutting the budget deficit to within 3 percent of GDP.

Despite removing the spending cap and delaying the surplus target, the plan reaffirms that Japan should go ahead with a 2 percentage point increase in the sales tax in October 2019. This would bring the tax rate to 10 percent. The government will consider policy measures to smooth out demand before and after the tax hike.

The government also intends to create a new residency qualification for skilled foreign workers to begin working immediately in sectors suffering from labor shortages. It will also consider tax and budgetary measures to assist people in buying homes and cars after the sales tax increase.

©2018 Bloomberg L.P.