Tokyo: Japan`s Cabinet has approved a blueprint for cuts to welfare and public works spending intended to repair the nation`s overstretched finances on Thursday.
Prime Minister Shinzo Abe has deferred a decision on hiking Japan`s sales tax, which might help fortify public finances until later this year.
Japan`s public debt amounts to more than twice the size of its economy. Earlier this week, the International Monetary Fund (IMF) reiterated its call for a "credible" fiscal plan to help bring it under control. Abe is expected to respond to IMF`s call at a summit of the Group of 20 major developed and emerging economies early next month.
The plan that was approved today would slash social security spending and reduce public works costs by 10 per cent.
Economists say the still-fragile recovery can be sustained only if the government tackles difficult reforms needed to improve Japan`s competitiveness and counter the impact of a fast-aging and shrinking population.
Abe`s ruling party controls both houses of parliament but it`s unclear whether the plan can win the approval of lawmakers without being significantly watered down. Cuts to benefits such as old age pensions are politically unpalatable in a fast-greying electorate.
Japan`s Finance Ministry and its central bank, which wrapped up a policy meeting today with no change in its extreme monetary easing policies have pushed for stronger fiscal discipline, warning that investors will lose confidence in the country`s finances if the debt continues to grow.
The proposed plan is expected to reduce the government`s deficit by USD 176 billion over the next two years. A key element of the reduction would come through lower spending on social security, such as old-age pensions and welfare.
The nuclear disaster is one of the several massive drains on national finances. Neglect of the country`s infrastructure has left many tunnels, dams and bridges in need of urgent repairs. Surging pension and health care costs for the growing elder population are among other pressing concerns.
So far, flooding the economy with cash appears to have helped support a recovery, with growth at 4.1 per cent in the January-March quarter.
But a cabinet survey released today showed that the confidence among people with jobs sensitive to economic conditions, such as restaurant workers and taxi drivers, worsened for the fourth straight month in July.
With the government already reining in spending to address fiscal concerns, and the sales tax hike due to dent consumer demand, future growth will depend on higher corporate investment and wages, Moody`s Investor`s Service said in a report. Otherwise, the government risks increasing debt without spurring enough growth to pay for it.