Japan: More Government Spending
Published 16 January 2015
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This article is no longer current. Please refer to Overseas Business Risk – Japan
Summary
Japan’s Cabinet approves a record £540 billion budget for 2015. Government confident it will achieve Japan’s 2015 primary deficit targets with borrowing at a 6 year low mainly as a result of reduced corporation tax and reliance on higher tax revenues. Finance Minister acknowledges need for expenditure reform. Current and future UK FDI secured following changes to Controlled Foreign Company rules.
Detail
On 14 January Japan’s Cabinet approved details of its draft 2015/6 budget. Overall the government plans to spend 96.3 trillion yen (£541bn) in FY2015/6. This is a new record high (2014: 95.9 tr yen). Social security spending accounts for 32.7% of all spending (up 3.3%) and debt interest for 24.3% (up 0.8%). Other areas of spending fare less well, with public investment unchanged and spending on education, energy and local grants reduced.
On the revenue side, the Government plans to collect 54.5tr yen (£306bn) in tax revenue, the highest in 23 years. This means that the level of additional Japanese Government Bonds required to cover the deficit will be 36.9tr yen (£207bn), the lowest in 6 years.
The budget includes corporation tax cuts of 3.29% over the next two years and legislates for the now postponed VAT increase from 8 to 10% in April 2017. After the Cabinet’s approval PM Abe stated that ‘the budget draft aims to achieve both economic recovery and fiscal consolidation’, emphasising the decline in government borrowing.
The budget also positively clarifies how Japan’s Controlled Foreign Company (CFC) rules will operate from April. Some Japanese firms based in the UK had feared that these would otherwise have made the UK a less attractive location to invest. The Government now expects 1.5% real GDP growth in 2015 (nominal growth: 2.7%), the first time GDP will have surpassed 500 trillion (£2.8trillion) in 8 years. However, they downgraded expectations of GDP growth in FY2014 to -0.5% real (1.7% nominal) as last April’s VAT rise hit harder than expected. Wage increases and lower energy prices are among factors expected to support Japan’s economy in 2015.
Comment
While the Government will achieve its international commitment to halve the primary deficit (compared to 2010) this year, it has acknowledged that relying on increasing tax revenues is unsustainable and that public expenditure overhaul is needed. Finance Minister Aso said on 14 January that ‘drastic expenditure reforms are necessary in order to achieve Japan’s FY2020 fiscal consolidation pledge’ of eliminating the primary deficit. The Government is due to reveal more details this summer when it releases its next fiscal consolidation plan.
The removal of uncertainty over how Japan’s CFC rules are to be implemented post April 2015 is welcome. Millions of pounds of investment and high quality jobs have now been safeguarded. Firms who had previously delayed committing to new projects will also now be investing in the UK and building prosperity.
Disclaimer
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