(Bloomberg) -- Japanese Prime Minister Shigeru Ishiba’s cabinet is expected to approve a record initial budget Friday for the next fiscal year that will ramp up spending on defense and support for local economies.
The budget for the year starting in April 2025 will total around ¥115.5 trillion ($735 billion), according to a draft of the plan obtained by Bloomberg on Wednesday.
While the draft shows the government will still have to lean heavily on debt issuance to help fund the spending, record tax receipts will enable the cutting back of fresh bond issuance by almost a fifth to ¥28.6 trillion. The reduction of new issuance below ¥30 trillion in initial plans for the first time since 2008 is welcome news for a nation that has the highest government debt load among advanced economies.
“The primary balance deficit will also likely turn out to be considerably smaller,” said Masaki Kuwahara, senior rates strategist at Nomura Securities. “The total budget amount appears to reflect the government’s consideration of fiscal consolidation.”
The government aims to balance the budget excluding debt-servicing by the fiscal year starting in April, a goal that now seems a possibility after looking out of reach for years.
The increase from the current fiscal year’s initial annual budget of ¥112.6 trillion is around 2.6%, largely in line with the government’s forecast for overall inflation in the current fiscal year. Ministries had earlier requested total outlays of ¥117.6 trillion.
Among the biggest increases are a jump of more than 10% in defense spending to ¥8.5 trillion and an increase of around 7% in grants to local governments.
Ishiba, a former defense minister, is a strong advocate of raising military spending and improving the working conditions of those employed in the nation’s defense forces amid a tense regional security environment in Asia. The rise in the defense budget largely fits in with increases already planned over coming years.
Boosting grants to local governments hits another key theme for the premier, who has long called for more central government support for regional revitalization.
The draft showed ¥38.3 trillion allocated for social security, up from ¥37.7 trillion. The upcoming budget doesn’t include reserve funds for price relief and wage growth measures.
While record tax receipts of ¥78.4 trillion will help limit reliance on government debt, the latest budget plan will still add to Japan’s debt pile. The International Monetary Fund already estimates the nation’s debt load at over 250% of gross domestic product in 2024.
The cutting back of fresh bond issuance comes at a key time for the government given that the Bank of Japan is likely to continue raising interest rates. That will put upward pressure on debt-servicing costs.
The government has set the rate for calculating the nation’s debt-servicing cost at 2% for the latest budget, up from 1.9% in the current year’s initial budget, according to people familiar with the matter.
“Expenditure can certainly increase to some extent given the higher tax revenue, but the government still needs to keep a balance,” Kuwahara said. “Higher yields will make it more difficult for the government to manage the outstanding debt.”
--With assistance from Takashi Hirokawa.
(Adds economist comment)
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