By Stanley White and Tetsushi Kajimoto
TOKYO (Reuters) – Japan’s government shifted focus on Tuesday to boosting economic growth and tax revenues to repair public finances, increasing concerns the government will shy away from painful and unpopular spending cuts.
The change in policy came after a meeting of the government’s top advisory panel, where private-sector members said the government should aim to keep gross domestic product growth above 2 percent in real terms and 3 percent in nominal terms.
The plan could come under attack due to worries that the economic assumptions are too optimistic and that it does not spell out how it will erase the budget deficit and meet an important fiscal discipline target in 2020.
Ratings agencies have already downgraded Japan twice since late last year due to frustration over the pace of fiscal reform, and its credit rating could come under further pressure if the latest plan is regarded as inadequate.
“Without economic revival, there will be no fiscal consolidation,” said Economics Minister Akira Amari.
“We’ve tried across-the-board spending cuts before, but in the end it didn’t work. This time we cannot fail.”
Many members of the Council on Economic and Fiscal Policy (CEFP), the government’s advisory panel, made comments on Tuesday praising an increase in tax revenue since Prime Minister Shinzo Abe took office in late 2012.
Many also said Japan cannot lower its debt burden without economic growth and warned that spending cuts could cause revenues to fall, which marked a clear shift from past comments that were more welcoming of spending cuts.
The growth targets in the plan can be achieved, some economists say. But the bigger concern is that by shifting the debate to growth, spending cuts will be left behind.
“Having growth targets is fine, but it could give the impression the government will try to rely too much on growth,” said Hiroshi Miyazaki, senior economist at Mitsubishi UFJ Morgan Stanley Securities.
The government is scheduled to raise the nationwide sales tax to 10 percent from 8 percent in April 2017.
Abe’s cabinet is not considering raising the sales tax beyond 10 percent, Amari said on Tuesday, but many economists have said an even higher sales tax rate is needed to lower the debt burden.
Japan’s government also set a new target of reducing its primary budget deficit to 1 percent of gross domestic product in fiscal 2018.
The new goal is aimed at returning to a primary budget surplus in fiscal 2020, and tackling Japan’s massive debt burden, which is the worst of any nation at more than twice the size of its $5 trillion economy.
Previously, the government estimated that the primary budget deficit would be 2.1 percent of GDP in fiscal 2018, which is worth around 11.6 trillion yen ($96.6 billion).
These estimates assume around 3 percent nominal economic growth and that the government does not take additional steps to cut spending.
Over the past five years, Japan’s GDP grew an average 0.7 percent in nominal terms, so aiming for 3 percent nominal growth may be seen as unrealistic at a time when economic growth has struggled to speed up.
(Additional reporting by Takashi Umekawa; Editing by Shri Navaratnam and Simon Cameron-Moore)