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Japan: Kan Unveils Fiscal Reform Plans, but Sets No Concrete Road Map
Source: japantoday.com
Source Date: Tuesday, June 22, 2010
Country: Japan
Created: Jun 28, 2010

The government announced a set of fiscal reform goals Tuesday, including a plan to achieve a primary surplus in fiscal 2020, but it failed to set a detailed road map to meet them or specify a timeframe for raising the sales tax despite its scenario proving a tax hike will likely be unavoidable.

Prime Minister Naoto Kan’s government, which is trying to avoid a Greek-style sovereign debt debacle, released the fiscal reform plan ahead of Kan’s trip to Canada to attend a series of summit meetings, including one of the Group of 20 major economies and emerging powers, and the July 11 House of Councillors election.

Kan said that Japan ‘‘must avoid losing our country’s confidence in the bonds market, leading to sharp interest rate rises and descent into financial collapse like Greece and other countries.’‘

The government seeks to bring the primary balance—annual revenues minus outlays other than debt-servicing costs—for both the central and local governments back into surplus by fiscal 2020 after halving the deficit by fiscal 2015.

In a medium-term framework through 2013, the government plans to cap budget spending below around 71 trillion yen, the level planned for fiscal 2010, and keep new government bond issuance below 44 trillion yen, also planned for the current year from April.

The government aims to come up with a detailed drastic reform for the taxation system including the consumption tax ‘‘at an early date’’ and calls on people to share the costs needed to ‘‘achieve security’’ and growth through the reform, while promising to continue its efforts to rein in wasteful spending.

But the assessment by the Cabinet Office indicated that Japan’s primary balance will log in fiscal 2020 a deficit of 13.7 trillion yen even under the scenario that it implements a strategy aiming for 2% economic growth on average, underlining the need to lift the sales tax by about 5 to 6 percentage points from the current level of 5%.

“Certainly, we will work out necessary reforms on spending and revenues so as to achieve the goals,’’ Finance Minister Yoshihiko Noda said at a press conference.

“By explaining the plan on such occasions as the G-20 summit in Toronto, we will try to win confidence from the financial markets as well as other countries,’’ the minister said.

The plan argues that previous governments led by the Liberal Democratic Party failed to rebuild fiscal health, as they only invested in sectors that did not help create growth or fresh jobs and held off on tax reforms needed to ensure stable social welfare programs.

It also urged ‘‘all-out efforts’’ by the government working closely with the Bank of Japan to end deflation, which has long helped worsen the fiscal balance and hurt consumer sentiment.

The Kan government, which was launched June 8 under the banner of ‘‘strong economy, strong finances and strong social welfare,’’ also said that enhancing social welfare services will contribute to improving consumer sentiment and subsequently lifting spending.

The general-account expenditures for fiscal 2010 amounted to 70.9 trillion yen including tax grants from the general account to local governments.

Japan’s gross public debt is approaching nearly 200% of the nation’s gross domestic product, the highest level among major economies and even higher than Greece and other European nations that have struggled with a credit crisis.

Kan is expected to attend a Group of Eight summit to be held in Huntsville, Canada, for two days from Friday, bringing together heads of Britain, Canada, Germany, France, Italy, Japan, Russia and the United States, and the Group of 20 meeting in Toronto on Saturday and Sunday.
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