News about Japan

[Tom MoodyParticipant]

Budget Request Ceilings: Where Is The Mechanism To Curb Spending?

How can the ballooning national budget be curbed without cutting existing expenditures? Government ministries and agencies must not request funds without carefully reviewing the necessity of projects.

The government has approved at a Cabinet meeting the budget request ceilings, which will serve as guidelines for ministries and agencies when submitting their budget requests for next fiscal year. Ministries and agencies will submit their requests by the end of August in accordance with the guidelines, after which the budget compilation process will begin in earnest.

The government has decided to approve a 20% increase from last year in “discretionary expenses” for public works and other projects. These funds can be allocated at the discretion of each ministry or agency for important policy measures such as countermeasures against rising prices.

A key feature of this year’s ceilings is the shift away from a long-standing mechanism in which cuts in existing expenditures were a prerequisite. Under this mechanism, which the government had used through last year, if discretionary expenses were reduced by 10%, then requests for important policy areas could be increased by up to three times the amount of cuts made in discretionary expenses.

The shift is said to reflect growing opinion within the ruling parties that the mechanism, which operated on a presumption of spending cuts, was based on deflation-era thinking.

However, given the nation’s fiscal conditions, there is likely no leeway to abandon the mechanism that curbs expenditures. The initial budget has exceeded ¥110 trillion for three consecutive years since fiscal 2023, and the outstanding amount of government bonds has topped ¥1.1 quadrillion.

With the arrival of a “world with interest rates,” the burden of interest payments on government bonds will become even heavier. Social security expenditures keep rising due to the aging population, and budget constraints are increasingly severe.

The national budgets swelled due to the COVID-19 pandemic, and the government set a policy to “return to normal times” in 2023. Where has that policy gone?

So-called budget request ceilings are essentially a mechanism to contain the budget. There have been cases in which a cap was placed on the total amount of requests, or a 3% reduction was imposed on public works expenditures in a method called “minus ceilings.” The role of budget request ceilings has become merely symbolic.

This time, the government has said it plans to continue allowing budget requests without specifying amounts for important policies.

Requests without specifying amounts are an exception for cases in which the content or scale of a policy cannot be foreseen. Since the pandemic, there has been a growing tendency to overly make such requests, and concerns remain that the requested amounts could effectively become unlimited.

The Finance Ministry should rigorously evaluate policies whose effectiveness is low.

As a result of the House of Councillors election, the ruling parties became a minority in both the House of Representatives and the upper house. Pressure for tax cuts, including reducing the consumption tax rate, and to expand spending without the support of adequate fiscal resources will certainly intensify.

Due partly to rising prices, tax revenue for fiscal 2024 posted a new record high for the fifth consecutive year. However, fiscal soundness will never be achieved if spending is increased as well.

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