Japan’s Mammoth Spending Likely Requires Third Extra Budget

(Bloomberg) -- Japan's ramped-up support for its economy is likely to require a third extra budget to help plug a record hole between surging spending and sliding tax receipts.

Virus response measures, billed by Prime Minister Shinzo Abe as the world's biggest, are set to widen the gap between Japan's expenditure and tax revenue to a record of around 100 trillion yen ($922 billion) this year, according to finance ministry figures.

Some economists say the situation is even worse than set out by the government. They say tax revenue is likely to fall well below ministry projections, making another extra budget almost certain as Japan tries to keep a grip on the developed world's largest public debt load.

Japan's predicament illustrates how quickly government finances can come under strain when global policy makers loosen their fiscal spigots when tax income is tanking. It also shows the difficulty of keeping tax and spending projections in sync at times of crisis.

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“The gap between spending and revenue is going to widen to levels never seen before. It's going to be worse than the Lehman shock record,” said economist Yuichi Kodama at Meiji Yasuda Research Institute, referring to Japan's budget shortfall during the global financial crisis. Another extra budget to help fill the gap is inevitable, he added.

Spending in the year to March 2021 is currently set to total 160.3 trillion yen, according to finance ministry figures for the general account following details of last week's proposed extra budget. Tax revenue is forecast at 63.5 trillion yen.

But the figures are based on tax projections from December rendered obsolete by Covid-19. SMBC Nikko Securities economist Koya Miyamae sees tax income falling to 51.6 trillion yen.

Japan has already announced it will allow some tax payments to be postponed. Income and corporate tax revenues will also likely tumble as Japan sinks into a deep recession. Even after drawing on reserve funds and cutting some routine spending, additional bond issuance is likely to be needed to fill the growing shortfall.

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For now, cabinet members say the need to protect jobs and livelihoods is the first priority, emphasizing the scale of Japan's response to support struggling companies and households. If another extra budget emerges, economists agree that it will also likely include more spending measures.

“Now is not the time to be talking about fiscal consolidation,” Economy Minister Yasutoshi Nishimura said last week. Abe's overall coronavirus response package so far is worth around 42% of GDP, nearly double the scale of measures launched by the U.K. and Germany, and triple the U.S.'s response as of May 29, according to Japan's finance ministry.

Economists say comparisons between the stimulus packages of countries around the world can be difficult due to the different kinds of measures included.

Still, while the starting point for habitual bond issuer Japan is very different from Germany's, the problem of deteriorating national finances is going to affect all countries, Kodama said.

“Globally everyone is doing the same. It's not just Japan that's reeling in shock, it's not just Japan whose finances are going to take a dive for the worse. If that was the case, the yen would have been sold off and there would have been capital flight,” he said.