TOKYO (REUTERS) - Japan's government said on Wednesday that it will not achieve its target of returning to a primary budget surplus in fiscal 2020, suggesting further steps will be needed to boost revenue and lower spending.
The target is considered an important checkpoint for Japan as it seeks to reduce a debt/GDP ratio that is the worst in the industrialised world, with public debt standing at around twice the size of its economy.
Giving greater priority to bolstering economic growth, Prime Minister Shinzo Abe's leading panel of advisers agreed budget guidelines on Wednesday that eschew spending cut targets, raising concerns the government could easily increase fiscal spending and add to the debt burden.
The Cabinet Office, which helps coordinate economic policy, said it expects consumer prices to rise more slowly than the Bank of Japan's 2 percent inflation target in fiscal 2016 due to declines in oil prices.
It also forecast the primary budget deficit, which excludes debt servicing costs and income from bond sales, will reach 6.2 trillion yen (S$68.57 billion) or 1.0 per cent of gross domestic product in fiscal 2020.
This is better than a previous forecast in February that put the primary deficit at 1.6 percent of GDP in fiscal 2020, The improvement reflected recent gains in tax revenue.
However, this still falls short of meeting the goal of returning to surplus in fiscal 2020.
Consumer prices were forecast to rise 0.6 per cent in fiscal 2015, a far slower than the 1.4 per cent forecast in February. The sharp downward revision reflects a collapse in oil prices. Consumer price inflation is expected to accelerate to 1.6 per cent in fiscal 2016, partly as economic growth picks up due to gains in consumer spending. Still, this is below the previous forecast of 1.8 per cent growth.
Bank of Japan Governor Haruhiko Kuroda has repeatedly said he sees a high chance of meeting his 2 percent inflation target in the first half of fiscal 2016, but the Cabinet Office's forecasts would suggest this is less likely.
Indeed, the Cabinet Office expects inflation to accelerate to 3.1 percent in fiscal 2017, but this would partly reflect a sales tax increase scheduled that year.
From fiscal 2018 onwards, the Cabinet Office expects inflation to stabilise at 2 per cent.