Katayama Says Japan’s Budget Reform the Biggest Since 1945

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(Bloomberg) — Japanese Finance Minister Satsuki Katayama cast the government’s push to reduce reliance on extra budgets as the country’s greatest budgetary reform since the end of World War II.

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“As for budget system reform, this is clearly the biggest overhaul since the end of the war,” Katayama told reporters in Tokyo, following Tuesday’s cabinet meeting. “That’s the level of commitment we’re bringing to it.”

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Prime Minister Sanae Takaichi has made moving away from use of extra budgets a key part of her efforts to strengthen fiscal discipline and reassure financial markets that her spending plans are “responsible.” Japan already has the highest public debt load among developed nations at over 200% of gross domestic product. Records back to 1949 show Japanese governments have rolled out at least one extra budget each year since then to top up spending.

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Still, war in the Middle East has complicated Takaichi’s plans with the Finance Ministry this month rolling out a ¥3.1 trillion ($19.4 billion) extra budget about two months into the current fiscal year. That snap spending plan includes a reserve fund to respond to inflation and other issues stemming from the Iran conflict.

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Takaichi had tried to avoid compiling the extra budget but ended up with little choice as reserve funds used to keep energy prices were depleted. But to underscore her message of sustainable fiscal policy, Katayama’s ministry managed to avoid adding to new bond issuance for the calendar year.

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“From the standpoint of maintaining fiscal discipline, relying on ad-hoc supplementary budgets is not desirable so consolidating spending into the initial budget can be seen as a positive step,” said Takero Doi, professor of economics at Keio University.

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Scrapping extra budgets would be a major change for Japan’s budgetary process given its annual reliance on them. Japan is also shifting from targeting a primary balance surplus to reducing its debt to GDP ratio. Efforts are also under way to weed out wasteful spending programs. Still, it remains unclear if these moves would constitute postwar Japan’s largest budget reform.

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In the early 1980s, Japan tried to adopt a zero-growth cap on spending plans to enable fiscal consolidation that gained a lot of attention but was short-lived. Then at the beginning of the millennium, then Prime Minister Junichiro Koizumi introduced a ceiling on bond issuance of ¥30 trillion and limited access to postal savings as well as pension reserves to fund fiscal investment loans. Koizumi also had difficulty sticking to his ceiling after the first year.

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Getting rid of extra budgets would remove one of the easiest targets for opposition parties and skeptical investors who claim the government is too loose with fiscal policy.

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“The basic problem is that the system has come to assume that there will be a fairly large extra budget at some point,” Katayama said. “As a result, it’s difficult to establish predictability at the start of the fiscal year, and a number of other drawbacks have emerged.”