Japan's record $940 billion budget may help COVID-hit economy, fiscal discipline in doubt

© Reuters. FILE PHOTO: A view of the skyline and buildings at Shinjuku district during sunset in Tokyo, Japan June 20, 2021. REUTERS/Pawel Kopczynski

TOKYO (Reuters) - Japanese Prime Minister Fumio Kishida's cabinet approved on Friday a record $940 billion budget for the next fiscal year as COVID-19 responses added to the costs of supporting an ageing population and rising military outlays to cope with China.

The 107.6 trillion yen ($941.55 billion) budget for fiscal year 2022/23, which starts in April, is Japan's biggest-ever initial spending plan, underlining its priority on reviving the pandemic-hit economy over restoring long-term fiscal health.

The first annual budget under Kishida comes after parliament approved 36 trillion yen of extra stimulus spending for this fiscal year to aid the recovery from COVID-19.

But there is still limited room for spending in growth areas like green and digital transformation.

The budget includes 5 trillion yen set aside to cover emergency costs of COVID-19, a record defence outlay of 5.37 trillion yen, the largest-ever welfare cost of 36.3 trillion yen and 24.3 trillion yen for debt servicing. Japan's public debt is twice the size of its $5 trillion economy, the heaviest among industrialised countries.

Kishida has pledged to improve Japan's public finances in the long run and the budget foresees new borrowing next fiscal year of 36.9 trillion yen, less than the 43.6 trillion yen initially planned for this year.

Lower borrowing will be replaced with higher tax revenues, seen rising for the first time in two years to a record 65.2 trillion yen as COVID-19 curbs on economic activity are eased.

The government estimates real economic growth of 3.2% in fiscal year 2022/23, up from a prior estimate of 2.2% which provides the basis for the budget plan.

But with debt still accounting for 34.3% of the budget, it will remain difficult to achieve a primary budget surplus by fiscal year 2025/26 as the government aims to do.

The primary budget deficit - excluding new bond sales and debt servicing - is seen at 13 trillion yen in FY2022/23, improving from 20 trillion yen seen this year but still far from the government's target.

($1 = 114.2800 yen)