ANALYSIS: Sky's the limit for Abe budget, adding to debt mountain

January 11, 2013


In a bid to speed up reconstruction work in Japan's disaster zone, Prime Minister Shinzo Abe has abolished a spending limit imposed by the last government.

And his administration has decided to do away with a ceiling on government debt issuance established by the government of the Democratic Party of Japan because no revenue is readily available to pay for stepped-up spending.

At a meeting of the Reconstruction Promotion Committee on Jan. 10, the first after the Liberal Democratic Party returned to power, Abe said the DPJ limit on reconstruction spending of 19 trillion yen ($215 billion) over a five-year period would be revised.

After the committee meeting, Abe met with Miyagi Governor Yoshihiro Murai and asked him to submit spending requests.

"I hope you will add more projects that you want implemented," he told the governor.

Murai later met with Finance Minister Taro Aso and said, "I will ask for larger amounts of money because we plan to announce a series of specific projects."

The governor later elaborated on this when he spoke to reporters.

"We have always had many projects in mind," he said. "However, in the past, there was a strict appraisals process."

Murai was obviously happy with the change in policy because the Miyagi prefectural government has calculated that reconstruction needs in that prefecture alone would amount to 10 trillion yen.

The DPJ government of Naoto Kan pledged to spend a total of 19 trillion yen on reconstruction over five years from fiscal 2011. However, it had already spent 17 trillion yen by the time of the initial budget in fiscal 2012. And with the Abe administration's recently announced emergency stimulus measures that included reconstruction projects totaling 1.4 trillion yen, the DPJ ceiling was close to being breached.

Officials in the disaster zone have expressed frustration at the slow pace of reconstruction, and Fukushima Governor Yuhei Sato had called for a review of the DPJ spending ceiling.

In general, LDP lawmakers represent more rural constituencies than their DPJ counterparts and those representing regions hit by the disaster were frustrated at being unable to do much to help.

Abe tried to respond to such concerns by declaring that reconstruction would take priority.

He chose to deliver his first campaign speech in Fukushima city, with all the symbolism that contained, on Dec. 4, the official first day of campaigning for the Lower House election.

"Japan has no future without reconstruction," he told voters.

In his first news conference after becoming prime minister on Dec. 26, Abe said, "Each member of my Cabinet will have a sense of being the reconstruction minister. We will implement all available policy measures."

Abe once again chose Fukushima Prefecture for his first visit to the region after becoming prime minister. During that trip, he set out a vision of greatly increased spending.

"We will implement reconstruction on a totally different scale from in the past," he said.

Meanwhile, the Abe administration has done little so far to address the issue that surfaced last year of money in the reconstruction budget being used for projects with little apparent connection to the natural disasters of two years ago.

When the LDP was still in opposition, it criticized the DPJ government for this apparent misappropriation. But at the same time, it was the LDP that demanded reconstruction budget cash be used for projects outside the disaster zone if the aim was disaster management.

Although Abe has asked for strict accounting of reconstruction budget spending, no specific measures have yet been announced to prevent the funneling of funds to causes unrelated to reconstruction.

The DPJ government imposed the spending ceiling because of difficulty identifying revenues to pay for it.

To avoid heaping ever greater debt on future generations, the DPJ government decided to implement income tax increases of 10.5 trillion yen. But that in itself was insufficient, so additionally it cut about 4 trillion yen from government spending--even shrinking civil-service salaries by an average of 7.8 percent over a two-year period.

The Abe administration could resort to further tax increases and spending cuts to pay for its mooted stepped-up reconstruction spending. However, it would face major hurdles.

For one thing, the consumption tax rate will increase from the current 5 percent to 10 percent by October 2015.

Asking households to shoulder a further tax increase would be unpopular. And civil servants would be unlikely to accept further salary cuts.

That leaves issuing new debt as the only way to pay. And indications are, that is what the government plans to do.

"We have been told informally that the projects would be paid for through the issuance of government bonds," said one local government source.

The problem, of course, is that Japan already has heavy debt, with close to half of the current fiscal year's 90-trillion yen budget being paid for by government bonds.

The outstanding balance of government debt is expected to reach 709 trillion yen by the end of fiscal 2012, a burden of 5.54 million yen for every person in Japan.

Concerns were raised at a Jan. 10 Finance Ministry meeting that heard from bond-purchasing financial institutions.

One worry was that interest rates would rise if the increase in debt triggered a loss of confidence in government bonds.

That would make loans more expensive for companies and households, and the resulting slowdown in their investment and consumption would further cool the economy.

(This article was compiled from reports by Jun Tabushi and Eiji Zakoda.)

  • 1
submit to reddit
Prime Minister Shinzo Abe, third from left, speaks at a meeting of the Reconstruction Promotion Committee, Jan. 10 (Teruo Kashiyama)

Prime Minister Shinzo Abe, third from left, speaks at a meeting of the Reconstruction Promotion Committee, Jan. 10 (Teruo Kashiyama)

  • Prime Minister Shinzo Abe, third from left, speaks at a meeting of the Reconstruction Promotion Committee, Jan. 10 (Teruo Kashiyama)

More AJW