Japan Blueprint to Propose Flexible Spending Limits

Japan’s government will release a fiscal blueprint on Monday that will recommend taking a flexible approach to limiting state spending rather than setting a rigid cap on the annual increase to reduce the government’s mountain of debt.  A copy of the final draft, seen by Reuters on Monday, recommended limiting rises in general account spending to 1.6 trillion yen ($13 billion) for the three years to March 2019, but stopped short of calling for a mandatory cap on spending.

The absence of a binding cap could raise concerns that the government would be tempted to spend more if economic growth falters, increasing a public debt burden that is already more than twice the size of its $5 trillion economy and the largest of any advanced nation.  The government has also set a goal of keeping GDP growth above 2 percent in real terms and 3 percent in nominal terms, according to the draft.

Policymakers are torn between banking on faster economic growth to increase revenues – as Prime Minister Shinzo Abe hopes – or exercising greater fiscal discipline to reduce the pressure on debt.  “The government is operating on the assumption that economic growth does well and tax revenue really starts to take off,” said Norio Miyagawa, senior economist at Mizuho Securities.