Policy panel hammers out growth strategy

Issued: January 22, 2007
Policy panel hammers out growth strategy

The government’s policy panel on Jan. 18 hammered out an economic and fiscal policy road map for the next five years that it hopes will lead the government to a surplus in the primary balance by fiscal 2011. The first medium-term policy strategy released under Prime Minister Shinzo Abe’s government is slated for cabinet approval on Jan. 25.

The program devised by the Council on Economic and Fiscal Policy, an advisory panel to the prime minister, presents a scenario in which nominal GDP will rise from 2.2% in fiscal 2007 to 3.9% in fiscal 2011, with an average annual rate of 3.2%. But it conditions its forecasts on necessary reforms being carried out. In case the reforms do not go through, the road map presents a lower nominal growth scenario of 2% in fiscal 2011.

“The next five years will be crucial in ensuring Japan’s economy can turn into a new growth engine,” said Abe, who chairs the panel, during the discussions. “We must speed up reform initiatives to ensure that this vision is realized.”

With the growth spilling over into increased tax revenue for the government, the panel sees this year’s 8.6 trillion yen primary balance deficit becoming a 1 trillion yen surplus in 2011.

Achieving 3.9% nominal growth depends on the government’s ability to put structural reforms on the fast track. And despite the declining population, the growth scenario supposes that the current working population will remain the same in 2011, approximately 66 million. If that is to be the case, labor laws must be changed to enable more women and elderly to work.

The high-growth scenario also assumes that the productivity growth rate, a key to boosting the latent growth rate, will rise from 0.9% at present to 1.5% by 2011.

Under a scenario whereby reforms fail and productivity growth falls to 0.8% – the same level as in the 1990s – nominal GDP is estimated to rise 2.0% in 2011, with real growth half that. Achieving a surplus in the primary balance in this case would require a 1-2 percentage-point increase in the consumption tax rate.

A surplus in the primary balance, which does not include debt-servicing costs, is not enough to achieve fiscal health. Even if a primary balance surplus is achieved by 2011, the more than 800 trillion yen in government debt already piled up could rise further on higher interest rates.

Hiroko Ota, minister of economic and fiscal policy, said Jan. 15 that the government had started a discussion to set a new target to reduce the public debt. “Reaching a primary balance is only a starting point,” she said. “It’s not as though we have to wait until fiscal 2011 to address the next step. We have begun internal discussions on setting a new goal.”

She also said that the debt-GDP ratio and the revenue-expenditure balance will play leading roles in the consideration of the next goal.