Japan budget sets record as tax revenues fall

Tokyo : Japan's government yesterday approved a record 92.3 trillion yen ($1 trillion) draft budget for the year to March 2011, achieving its self-imposed cap on new bond issues amid investor worries about a bulging public debt.

The first budget under the Democratic Party-led government, in office for just three months, keeps new borrowing at 44.3 trillion yen, a record amount but in line with its promise to keep fresh debt issuance to 44 trillion yen as public debt nears 200 per cent of GDP.

Faced with nervous bond investors and a threat to downgrade Japan's debt rating, the government abandoned a key campaign pledge to cut petrol taxes to plug a hole caused by falling tax revenues.

Tax revenues

Tax revenues are expected to make up less than half the government's 2010-11 budget, falling behind new debt borrowing for the first time since the Second World War for an initial budget, after a deep recession that devastated company profits.

Despite the big bond issuance, the government also needed to find a record 10.6 trillion yen of "non-tax" revenues to fill the gap, much of it by raiding cash reserves.

Japan's public debt is expected to reach 862 trillion yen, or 181 per cent of GDP at the end of March 2011, the finance ministry said, the highest among developed nations.

Japan may avoid a ratings downgrade as new debt issuance broadly matched the government's target.

The new government, which vowed to reorient spending to households is spending more on welfare and and education but cuting public works spending by a record 18.3 per cent, a traditional way for Japanese governments to boost the economy.

The initial budget may not be the final say. If the economy worsens again the government could announce extra budgets -- of which it has presented two this year.