FY2005 budget remains tight for 4 years in a row

A new year, 2005, has started off. According to the Chinese astrological calendar, this is the Year of the Cock.

The FY2005 budget that was finalized at the end of last year was another austere one, for the fourth straight year. Almost all expenditures, with the exception of social security costs, were cut, and, for the first time in four years, the issuance of government bonds dropped below the previous year's level.

The value of general accounts totaled 82.1829 trillion yen, up 0.1% over the FY2004 budget. The general expenditure budget which is used for policy expenses was 47.2829 trillion yen, falling 0.7% and marking the first drop in three years.

Regarding general expenditures, educational and science/technology promotion spending decreased 7.2%, constituting the largest cut ever; ODA spending decreased by 3.8% and marked 6 consecutive years of decline; and public works-related spending also decreased 3.6%, a drop for four straight years. The defense budget decreased 1.0%, a drop for two years in a row.

Social security expenditures were reexamined, and in the case of nursing care insurance, although revisions were made, such as making the residents of special elderly nursing homes and other facilities pay for all the food and housing costs themselves, in principle, the overall budget could not be cut down as expected. This was because, with falling birthrates and the aging of the population progressing further, increased social security expenses eclipsed curtailments of other expenses.

The FY2005 budget may be said to have left Japan with two problems.

First, many of the measures, which are to be taken by cutting back expenditures almost to the limit, and at the same time ensuring tax revenue, are linked directly to forcing the Japanese public to shoulder an even greater burden. This in itself may breed growing discontent among the population, and there is a risk that the administration will lose its supporters, despite the fact that everybody knows that reducing the country's huge financial deficits and restoring financial health are extremely important and necessary, and that, to do this, people are showing a set level of understanding for curtailing expenses and increasing government revenue.

The other problem is that, although budget revenue counts on increases in tax revenue generated by business recovery, the costs of welfare and education, which will increase from this fiscal year onwards, may trigger a drop in personal spending. As a result, the expected full-scale economic recovery may not materialize as projected.

Moreover, budget revenue still depends heavily on issuance of government bonds, although the rate of dependence is said to have improved somewhat. Debt from government bonds issued at the end of FY2005 is expected to reach 538 trillion yen, corresponding to 12 years' worth of national tax revenue. This is an astronomical figure that is too big for the general public to perceive as something relevant to them. Prospects for financial reconstruction therefore remain extremely bleak.

US$=\102 (January 17, 2005)