The combined surtaxes are worth ¥2.5 trillion in revenue for the government.

The promise to scrap highway tolls (albeit ‘progressively’) will now be restricted in fiscal 2010 to those normally imposed on low-traffic rural highways in outlying areas. This will limit potential revenue losses and preserve in skeletal form the policy’s primary rationale as explained by the 2009 manifesto – revitalising regional economies. The major revenue earners for the government – the expressway networks in and around Tokyo and Osaka – will not be eligible for the cuts. In fact, MLIT will impose a new system that sets tolls based on vehicle type as well as scrapping weekend and holiday discounts. The immediate reason for the government’s turn-around on toll-free highways was the ¥500 billion cut MLIT sustained in the total compensation (around ¥600 billion) it sought from general revenue to replace the income from tolls in the fiscal 2010 budget.

Now Vice-Finance Minister Noda has said that implementing full-scale child allowances from JFY 2011 will be ‘difficult’. The child allowance has been a pillar of DPJ election policies since its 2005 manifesto, as the following indicates:

• – the 2005 Lower House manifesto under DPJ leader Okada pledged a monthly child allowance of ¥16,000
• – the 2007 Upper House manifesto under DPJ leader Ozawa pledged a monthly child allowance of ¥26,000
• – the 2009 Lower House manifesto under DPJ leader Hatoyama offered a monthly child allowance of ¥26,000 from fiscal 2011 (with 50%, or ¥13,000 implemented in the first year).

The full-rate for 2010 survived an attempt by the Ozawa office to impose an income limit on recipients.

In explaining the decision on childcare allowances, Vice-Minister Noda referred to the significant revenue shortfall facing the government in the short term. The full child allowance was budgeted in the manifesto at ¥5.5 trillion a year (or 10 per cent of 2010 budget general expenditures of ¥53.4 trillion). Noda did not dismiss the possibility of the ¥26,000 being offered at some time in the future.

In the short-term, it appears that the DPJ’s manifesto promises are being trumped by hard fiscal realities. The Hatoyama government finds itself between the proverbial rock and a hard place. The 2010 budget draws just under half (48%) of its revenue from government bonds, and so the government was not in a position either to forgo major revenue sources or to commit itself to fiscal largesse.

The budget crunch has been exacerbated by the decrease in tax revenue and the failure of the Hatoyama government to generate sufficient savings from slashing so-called ‘wasteful expenditure’. The DPJ argued in its manifesto that financial resources could be found for measures such as the child allowance by cutting waste in existing spending. But the GRU process yielded only around ¥1 trillion in proposed spending cuts while the ministries, ordered to reduce wasteful expenditure, produced only a combined total of ¥1.3 trillion in savings. The ¥2.5 revenue loss from eliminating the gasoline surcharge etc. was supposed to have been replaced by cutting back on public works projects, but this move was resisted by MLIT because it would have amounted to a reduction of more than a third of the central government’s public works expenditure.

The DPJ government was hoping to realise its policy pledges and to reconstruct public finances at the same time. Instead, it ended up compromising both objectives, despite the largest ever General Account budget of ¥92.3 trillion for 2010. It only balanced government finances by tapping into ¥10 trillion in non-tax revenue such as unused funds in special accounts (Kasumigaseki’s so-called ‘hidden treasure’). But financial resources such as these cannot be used repeatedly.

Public opinion polls seem to show that the public, as well as the business community, are generally behind the dose of fiscal reality that the government is dishing out. Yet its latest moves undermine two important aspects of the DPJ’s performance: the credibility of its manifesto pledges in the lead-up to another general election and the government’s own domestic demand-side growth strategy, which relies on boosting households’ disposable income through budget handouts in order to encourage consumer spending.