Fiscal Stimulus of the New Fiscal Package: How big and How soon?

A new fiscal stimulus package has been announced

The government announced in December 5 that a decision has been made to implement a new fiscal stimulus package called the “Comprehensive Economic Policy Package to Open-up a Future of Reassurance and Growth.”

The aim of the fiscal stimulus package are threefold: (a) to restore from the damages done by the natural disasters and secure safety and relief of the people; (b) to assist efforts to overcome the downside risk to the economy; and (c) to invest for the future and reinforce economic vitality to prepare for the period after the Olympic and Paralympic Games.

The total size of the package is estimated to be 13.2 trillion yen, in terms of fiscal spending, or 26.0 trillion yen, including the estimated induced spending by the private sector. Of the total fiscal spending of 13.2 trillion yen, government expenditure by the central and local governments is said to be 9.4 trillion yen, and the remaining 3.8 trillion yen will be the lending by the fiscal investment and loan program. The spending is to be made by both a supplementary budget for FY2019 and the initial budget for FY2020.

The total size of the new fiscal stimulus package is roughly equivalent to that of the last fiscal stimulus package announced three years ago in August 2016; its fiscal spending was estimated to be 13.5 trillion yen, or 28.1 trillion yen if induced private spending is included.

Since the purpose is to stimulate the economy, an obvious interest will be in the magnitude of the stimulus and the timing of its emergence. However, they are not easy to predict. The issues related to the prediction will be discussed in the following in turn.

How big will be the size of the stimulus?

First is about the magnitude of the stimulus. The most important determining factor of this is the way the fiscal stimulus package is going to be financed.

Take the example of an additional government expenditure by the central and local governments. If it is financed by issuing government bonds, it will have a positive multiplier effect. Needless to say, we have to bare in mind that it would increase the already high government debt we have. It makes it more difficult to achieve the government’s fiscal consolidation target of achieving primary surplus by FY2025.

If it financed by reducing expenditure on other items, it will not add to the government debt we have. However, in this case, any positive multiplier effect will be offset by the negative multiplier effect that results from the reduction.

Therefore, the way it is financed is very important, both in terms of the magnitude of the stimulus and its implication for the fiscal situation. However, we will not know how it will be financed until the supplementary budget for the FY2019 and the initial budget for FY2020 is announced.

As for the lending made by the fiscal investment and loan program, it is a little more complex.

Fiscal investment and loans program (FILP) is managed by a special account, separate from the ordinary account. In order to finance the lending, it issues FILP bonds; the repayment of the bonds are to be made out of the repayment of the lending that is made. Because of this financial characteristic, the System of National Accounts (SNA) treats FILP as one of the public financial corporations, not as a part of the government. Therefore, issuing FILP bonds do not increase the government debt per se.

However, even though this may be the case, we must not forget that FILP bonds are explicitly guaranteed by the government. It implies that, if the lending becomes non-performing and a difficulty arises in its redemption, the government has to make transfers to the special account. Therefore, there is a potential risk of increasing the government debt.

How soon can we see the stimulus?

Second is about the timing of the package.

In order to see the impact as quickly as possible, the package needs to be reflected in the supplementary budget for FY2019 which authorizes the expenditure during FY2019. However, been included in the supplementary budget do not assure that it will actually be disbursed during the fiscal year. That is because disbursement requires contracts with the private sector firms and the process may take some time to be formalized.

When the disbursement wasn’t able to be made during the fiscal year, the authorization is carried over to the next fiscal year, and the actual disbursement would take place in the next fiscal year.

This kind of a time lag is reflected in the carry-overs to the next fiscal years recorded in the settlement account of the government budget. When the last fiscal stimulus package was introduced three years ago, the supplementary budget for FY2016 included an addition of expenditure by a net of 3.5 trillion yen (there was an addition of 6.1 trillion yen but it was partly financed by a reduction of 2.6 trillion yen). However, expenditure amounting to 5.1 trillion yen was carried-over to FY2017. If that is the case, stimulating effect will also be carried-over.

The amount of carry-overs can be affected by the timing of the supplementary budget. If the supplementary budget was approved by the Diet in the early months of the fiscal year, even though there is a time lag, the disbursement could still be made during the fiscal year. However, if the supplementary budget was approved by the Diet towards the end of the fiscal year, the time lag will easily lead to a large carry-overs to the next fiscal year. For example, when a fiscal stimulus packages was introduced in January 2013, the supplementary budget for FY2012, which authorized a net additional expenditure of 10.2 trillion yen, only passed the Diet in February 26. The carry-over of expenditure, as a result, amounted to 7.6 trillion.

Since the supplementary budget for FY2019 will only pass the Diet in early-February, at the latest, we should expect the bulk of the fiscal stimulus package to become apparent only in FY2020.

Focus will be on the budget formulation process

Whether there is a need for such a fiscal stimulus package is something to be discussed separately. On one hand, it is related to how we assess the current business condition which is subject to downward pressure from the global slowdown due to trade frictions and the consumption tax rate-hike. On the other hand, we need to consider the impact on the fiscal situation which is already bad enough in terms of government debt to GDP ratio.

Even if we acknowledge that we do need a fiscal stimulus package, the magnitude and the timing of the stimulus it brings depend a lot on how the supplementary and initial budgets are going to look like. We need to watch closely the budget formulation process that is going to take place towards early next year.