Japan’s Cabinet Approves Record Budget to Soften Tax-Hike Blow

(Bloomberg) -- Prime Minister Shinzo Abe’s Cabinet approved a record initial budget for the 2019 fiscal year that offers plenty of help for consumers facing a higher sales tax while increasing the nation’s debt load, at least for now.

The budget will top 100 trillion yen ($890 billion) for the first time, highlighting the government’s push to head off a potential economic downturn when the levy rises in October. The broad outline of the plans were revealed earlier in the week in draft documents.

The hope is that once Japan gets over this hump and economic activity returns to normal, the government will have a higher tax revenue base to address its debt burden and rising social costs. The risk is that the extra spending and other measures to lessen the tax blow are left in place and debt swells.

Key elements of the budget, which increases to 101.5 trillion yen for the 12 months starting in April, from 97.7 trillion yen this fiscal year, are:

  • General spending of 62 trillion yen.
  • Debt servicing costs of 23.5 trillion yen.
  • Payments to regional and local governments will be 16 trillion yen.
  • Forecast tax revenue of 62.5 trillion yen.
  • Revenue from bond issuance at 32.7 trillion yen.
  • Other revenue of 6.3 trillion yen.
  • The bond dependency ratio, which shows how much of total income is from selling bonds, will drop to 32.2 percent from 34.5 percent last year.
Japan’s Cabinet Approves Record Budget to Soften Tax-Hike Blow

The government regularly crafts extra budgets later in the fiscal year that can push up spending further, so the initial budget numbers don’t give the complete picture of spending.

Japan’s parliament approved an additional budget of 936 billion yen last month for the current fiscal year, and the cabinet passed a second supplemental budget of 3 trillion yen Friday.

“The biggest characteristic of the fiscal year 2019 tax reforms and budget is that it overdoes the measures to limit the impact from the sales tax hike,” Koya Miyamae, senior economist at SMBC Nikko Securities, wrote in a Dec. 18 note. “It’s likely to leave issues for future fiscal consolidation.”

Still, higher revenues from the tax hike and reduced issuance of government bonds will improve Japan’s primary balance -- the government’s budget deficit excluding debt servicing.

It’s forecast to become a deficit of 9.2 trillion yen next fiscal year, the lowest level in 12 years. Japan is targeting a primary surplus by the fiscal year starting April 2027.

©2018 Bloomberg L.P.