Japanese Prime Minister Junichiro Koizumi isn't likely to heed calls from his party to increase spending next year to boost the world's second-largest economy, analysts said.
The Cabinet yesterday agreed in principle to cap general spending -- excluding debt payments and subsidies to local governments -- at ?48.1 trillion (US$399 billion) in the fiscal year starting April 1, an increase of 1 percent.
A 3 percent cut in the public works budget and a 2 percent reduction in foreign aid and other discretionary spending will allow Koizumi to say he's fulfilled pledges to curb spending. At the same time, the prime minister, who faces re-election to the presidency of the ruling Liberal Democratic Party on Sept. 20, is taking care not to alienate party leaders.
"There will be nothing new in next year's budget plan," said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Manage-ment Co. "Koizumi hasn't exacerbated Japan's fiscal debt problems as much as other ruling party legislators would have done, but he hasn't made any progress on the situation, either."
Koizumi has promised to curb wasteful spending on roads, bridges, dams and other public works, the favored method for boosting an economy that's been through three recessions in 12 years while providing help to political supporters. Growth of Japan's public debt -- the developed world's largest at 140 percent of GDP -- has prompted cuts to its debt rating.
Discussion of other issues, such as rising social welfare costs and subsidies to local governments, will also be delayed until after the party election, analysts said. In Japan, the head of the ruling party becomes the prime minister.
"Given the political schedule in the fall, an increasing number of important policy decisions are likely to be postponed, setting the stage for backtracking on public pledges in the second Koizumi government in both fiscal policy stance and banking regulation," said Yukari Sato, a senior economist at JP Morgan Securities Asia.
Finance Minister Masajuro Shiokawa said the government can't reduce spending because an ageing society will push up social welfare costs.
Shiokawa said the slowing economy prevented the Cabinet from approving larger cuts to public works projects. Japan's economic growth fell to 0.1 percent in the first quarter, the slowest pace in a year.
"Personally, I wanted to make a bigger reduction, but we had to consider support for the economy," Shiokawa said at a press conference yesterday.
Taro Aso, head of the LDP's policy research council, and other legislators have urged Koizumi to suspend efforts to curb the public debt and instead to increase public works spending to create jobs and spur growth.
The government forecasts the economy will expand 0.6 percent next fiscal year. That means Koizumi won't need to compile an extra budget this year to spur growth, said Muto of Sumitomo Mitsui Asset Management.
When he came to power in April 2001, Koizumi pledged to cap new bond sales at ?30 trillion a year. He was forced to break the promise this year because tax revenue fell. Japan plans to sell ?36.4 trillion in new bonds this fiscal year.
It's likely new bond sales will again exceed ?30 trillion this year, analysts said. The Ministry of Finance projected in February that the gap between spending and tax revenue will come to ?41.8 trillion.
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