Japan’s Government Proposes First Spending Cut in 7 Years

Japan unveiled a government budget for 2013 that cuts spending for the first time in seven years, underscoring Prime Minister Shinzo Abe’s efforts to establish fiscal-discipline credentials even as he seeks to boost growth.

The Cabinet in Tokyo today approved a proposed spending total of 92.6 trillion yen ($1 trillion) for the fiscal year starting April 1. That’s down 0.3 percent from this year’s main budget, which excludes a 13.1 trillion yen extra budget to pay for fiscal stimulus.

Abe faces the challenge of leading the country out of its third recession in five years while containing a public debt that’s twice the size of the economy. Most of the reduction in spending next year comes from the elimination of reserve funds that the previous government tapped for stimulus measures.

“It’s a narrow path,” said Kyohei Morita, chief economist at Barclays Plc in Tokyo. “We can see Abe’s determination for fiscal reform in the budget, but it’s too early to say whether he can achieve it.”

Lawmakers will debate the spending plan in a session of Parliament that opened yesterday, with Abe’s Liberal Democratic Party back in power after last month’s lower house landslide.

Abe’s efforts to revive the economy have won an initial vote of confidence in the market. The extra yield investors demand to hold 10-year Japanese government bonds instead of five-year notes was at 58.5 basis points today, falling from the seven-month high of 64.3 basis points on Jan. 11. Longer debt tends to be more sensitive to the market’s fiscal outlook.

Reserve Funds

To save money, the government will eliminate 910 billion yen in discretionary funds in this year’s budget. It will also cut tax subsidies to local governments by 1.2 percent and reduce spending on education by 0.8 percent, according to the plan. The salaries of central government officials will be cut by an average 7.8 percent in the proposal, saving 271.3 billion yen.

Planned new bond issuance next year is 3 percent lower at 42.9 trillion yen, according to the budget plan, bringing the share of the budget financed by borrowing to 46.3 percent from 47.6 percent last fiscal year.

The government predicts that tax revenue will exceed cash raised from bond sales for the first time in four years.

Social welfare spending will rise to a record 29.1 trillion yen, 10.4 percent higher than the current fiscal year, as Japan’s population ages, the plan showed.

One in every four people in Japan will be older than 65 in 2014, compared with 9.6 percent in China and 14.2 percent in the U.S., according to data compiled by the U.S. Census Bureau.

Public Works

Public works spending will rise 15.6 percent to 5.3 trillion yen as Abe pledges to restore aging infrastructure. The defense budget will rise 0.8 percent to 4.8 trillion yen.

Debt-servicing costs -- including interest payments for outstanding bond issuance -- will rise 1.4 percent to a record 22.2 trillion yen.

Japan’s public debt will climb to twice annual economic output next fiscal year, according to the government’s estimate. The International Monetary Fund predicts that the nation’s debt probably rose to 237 percent of annual economic output in 2012.

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