EDITORIAL: Debt-reliant budget

The Lower House on Tuesday passed the draft fiscal 2010 budget, paving the way for final Diet approval. But the development is hardly a cause for celebration, given growing uncertainty over the state of the nation's public finances.

As an initial proposal, the 92-trillion-yen ($1 trillion) general-account budget is the biggest ever compiled. The issuance of new government bonds, at 44 trillion yen, will exceed tax revenues for the first time.

The budget is a window on the state of the nation; one that is addicted to debt.

The Democratic Party of Japan-led coalition compiled a record budget for fiscal 2010 in part because of the plunge in tax revenues caused by the global recession and measures adopted to surmount that crisis. Another important factor concerns policies the DPJ adopted so it can deliver on its election pledges.

Payments of half the promised child allowance, the lifting of expressway tolls on certain routes and other programs have helped swell expenditures. But lasting revenue sources are required for the DPJ to live up to its election promises.

The government appears determined to ignore this reality and rely on debt financing. Some market observers warn of a possible crash in the value of government bonds if lawmakers continue to defer debate on tax increases.

A major U.S. credit rating company has indicated that it may downgrade the rating of Japanese government bonds. The fiscal crisis in Greece is hardly the proverbial fire on the far shore.

Banks and other financial institutions have channeled their surplus funds into government bonds because corporate demand for borrowing remains weak. At times like these, it is not difficult for the government to find bond buyers. But markets will get jittery without a clear course for the future.

Prime Minister Yukio Hatoyama appears largely oblivious to this impending crisis. He has shown no sign of backing down from campaign promises, such as paying the full child allowance.

The government will have to issue more bonds to finance the fiscal 2011 budget if the election pledges are left as they are. The expenditures must be reined in by drastically reviewing the road map for programs included in the DPJ manifesto.

The U.S. administration of President Barack Obama last month passed a law for mandatory spending cuts or tax increases to cover new policies that require revenue sources. The Hatoyama government would be well advised to establish a similar guiding principle.

It is important to root out wasteful spending through project reviews and other means.

But budget reviews last year achieved only 700 billion yen in savings, a far cry from the DPJ's target of 3 trillion yen. It is clearly impossible to rebuild a 40- to 50- trillion-yen budget shortfall by slashing wasteful expenditures alone.

The government must face up to the reality that raising the tax burden is unavoidable. That is the only way to mend and enhance the fraying state of social security.

Finance Minister Naoto Kan last month announced his intention to initiate discussions on tax reform, including raising the consumption tax rate.

The Hatoyama government plans to compile a midterm financial framework and fiscal management strategy as early as June. The government must convey its vision for fiscal reconstruction through these exercises.

Preparations must begin to enable tax reform, centered on a consumption tax increase, to start once the economy emerges from deflation.

The government must demonstrate its resolve and prospects to achieve fiscal sustainability. That would ease public and market anxiety and help jump-start consumption and investment. We look forward to speedy discussions, with Kan in the driver's seat.

--The Asahi Shimbun, March 3