Reuters News - Japan government approves $1.02 trillion budget for 2013/14 amid fiscal worries

By Tetsushi Kajimoto

TOKYO | Tue Jan 29, 2013 3:47am EST

(Reuters) - Japan's government approved on Tuesday a $1.02 trillion draft budget for the next fiscal year that aims to nudge tax revenues above new bond sales for the first time in four years, but still relies on borrowing to cover 46.3 percent of its spending.

The first full-year draft budget compiled under Prime Minister Shinzo Abe, who led his Liberal Democratic Party back to power last month with promises of economic revival, marks symbolic improvement after years of deterioration.

With the 92.6 trillion yen ($1.02 trillion) in spending, the government effectively trimmed the size of its draft budget from the previous year for the first time in seven years, taking into account government funding for basic pension payouts.

Still the budget size hovered around record levels, underlining the difficulty which Abe's government is facing in striking a balance between economic stimulus and fiscal reform.

Taken together with an 10.3 trillion yen extra stimulus plan signed off earlier this month and financed in more than half by new bond sales, it drives borrowing to new highs, pushing Japan's record high debt further into uncharted territory.

In fiscal year 2013/14 starting in April, the government plans to issue new bonds worth 42.8 trillion yen, below this year's 44.2 trillion yen initial target. But combined with the extra budget borrowing of 5.2 trillion, Abe's government will borrow 48 trillion yen, though technically the extra budget borrowing will be booked in the 2012/13 accounts.

Tax revenue is targeted to rise 750 billion yen to 43.1 trillion yen, mainly reflecting an expected pick-up in economic growth to 2.5 percent from 1.0 percent forecast for the current year.

FISCAL TARGETS

Within the 92.6 trillion yen general-account budget, spending excluding debt servicing costs is estimated at about 70.3 trillion yen, slightly less than the 71 trillion yen earmarked in the regular budget for the current fiscal year.

The government is expected to submit the extra budget to parliament this week and the 2013/14 budget in late February.

The previous government led by the Democratic Party of Japan had set a 44 trillion yen ceiling on annual bond issuance and a 71 trillion yen cap on spending excluding debt servicing costs.

Rating agencies, institutions such as the International Monetary Fund and many economists have been saying that the limits were seriously insufficient, allowing Japan to rack up budget deficits of close to 10 percent of GDP, above those seen in some of the most indebted euro zone countries.

So far, however, vast domestic savings have allowed Japan to comfortably cover nearly all of its financing needs at home and at record low interest rates.

Abe's government has reaffirmed its predecessors' goal of bringing the primary budget, which excludes borrowing and debt service, into balance by 2020/21. This can only be achieved with substantial spending cuts and tax hikes.

With Japan's population rapidly ageing, social security spending reached 29.1 trillion yen, including a natural annual increase of 800 billion yen and accounting for about one-third of the budget spending.

Public works outlays were increased from the previous year for the first time in four years to 5.3 trillion yen as Abe focuses on disaster prevention and other infrastructure spending, compared with the peak of 15 trillion yen hit in the late 1990s.

The snowballing debt has boosted debt-servicing costs -- interest payments and redemption -- to 22.2 trillion yen, up 300 billion yen from a year before, even with an expected interest rate at its lowest of 1.8 percent.

The government earmarked in a separate special budget account 4.4 trillion yen for rebuilding in areas battered by the 2011 earthquake.

It boosted planned reconstruction spending to 25 trillion yen from the current 19 trillion yen for a five-year period up to fiscal 2015/16 by selling its stakes in Japan Post Holdings Co and tapping other budget reserves.

($1 = 90.6350 Japanese yen)

(Additional reporting by Kaori Kaneko; Editing by Tomasz Janowski and Kim Coghill)