Will the Primary Balance Deficit Continue in FY2026?

◆The initial budget proposal for FY2025, submitted by the government to the National Diet, was revised and passed on March 31, 2025. While tax cuts and increased expenditures were incorporated at the request of opposition parties, no additional bonds will be issued, giving the appearance that fiscal conditions will not worsen.

◆However, since the burden on the general account is being offset by the special account, the primary balance (PB) of the central and local governments, as calculated by the Cabinet Office's "System of National Accounts" (SNA), will deteriorate by 0.2 tril yen. Furthermore, starting in FY2026, when non-tax revenues are eliminated and tuition support for high school students is expanded, the PB deficit is expected to widen to nearly 0.8 tril yen. Additionally, while the reduction in reserve funds had a positive impact on the PB on a budgetary basis, this effect is expected to dissipate on a settlement basis, leading to a PB deterioration exceeding 1 tril yen.

◆Moreover, there are concerns that the adverse effects of the US Trump administration's high-tariff policies (Trump Tariffs) could lead to an economic downturn, resulting in a tax revenue decline of 1.6–3.3 tril yen.

◆The government has set the achievement of a primary balance surplus for central and local governments as its fiscal consolidation target. The Cabinet Office's "Economic and Fiscal Projections for Medium to Long Term Analysis," published in January 2025 before the budget revisions, estimated a PB surplus of 0.8–2.2 tril yen for FY2026. However, considering the impact of the budget revisions and the Trump Tariffs, the PB is projected to deteriorate by approximately 2.7–4.3 tril yen, potentially resulting in a deficit. Achieving fiscal consolidation in FY2026 is becoming increasingly difficult.