Premier Shinzo Abe's administration is working on a fiscal reform plan to meet its pledge of turning Japan's primary budget into a surplus by fiscal 2020. The plan will be part of a broader government guideline on long-term economic policymaking due by the end of June.
The government will raise the "tax revenue elasticity rate" - or the ratio of how much tax revenues rise or fall against a change in nominal economic growth - to 1.2 or 1.3 from the current level around 1.0 percent. The outline confirms what government sources told Reuters earlier on Monday.
A higher elasticity rate means a country can expect to reap higher tax revenues and make more progress in restoring its fiscal health from an expansion of economic growth.
Setting a higher rate thus meshes with Abe's preference to rely on boosting economic growth, rather than on deep spending cuts or tax increases, in restoring Japan's tattered finances.
"Tax revenues have recently overshot the government's conservative projections, so raising the elasticity rate to such levels seems natural," said Hiroshi Miyazaki, senior economist at Mitsubishi UFJ Morgan Stanley Securities Japan.
"The idea also makes sense given Abe is keen on avoiding big spending cuts that could hurt the economy."
The new estimate based on the higher elasticity rate was presented by private-sector members of a key government panel, which is debating the guidelines, at a meeting on Monday.
AVOIDING SPENDING CUTS
With Abe having ruled out big tax hikes, the government is seeking ways to cut costs particularly in social welfare and medical spending, which are ballooning due to a rapidly ageing population.
But progress has been slow due to resistance from lawmakers wary of drawing complaints from pensioners in their constituencies.
Critics say Abe is trying to avoid painful spending cuts with the rosy tax revenue forecasts. Some government officials concede hitting an elasticity rate of 1.2 to 1.3, a level seen during the high-growth period of the 1980s, isn't easy.
"The rate seems reasonable if it's for one year but would be questionable to use for long-term projections," said Sayuri Kawamura, a senior economist at Japan Research Institute.
Alarmed by Abe's relaxed approach on fiscal discipline, a panel of the finance ministry - in charge of tax and budget making - on Monday proposed keeping annual rises in social welfare spending below 0.5 trillion yen (2 billion pounds) for the next five years. But officials close to Abe oppose setting numerical targets for spending cuts.
Japan's debt burden, at more than twice the size of its $5 trillion economy, is the heaviest in the developed world.
(Additional reporting by Takashi Umekawa, Takaya Yamaguchi and Izumi Nakagaw; Editing by Jacqueline Wong)
By Leika Kihara
