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Cuts may weaken domestic demand

By: Jun Saito
 Asahi Shinbun, July 20, 2002

Attempts by Prime Minister Junichiro Koizumi to slash administrative and policy-related spending could backfire and smother domestic demand, depriving the economy of its ability to revitalize, experts warn.

``Slashing spending on such areas as the pension system, unemployment benefits and support for small businesses will dampen the recovery of domestic demand,'' said Kazutaka Kirishima, senior economist at Sumitomo-Life Research Institute. ``In the long run, this could lead the economy deeper into recession.''

While domestic demand remains stagnant due to a slump in personal consumption, robust demand from abroad is edging the economy toward recovery. Experts agree bolstering domestic demand is the key to getting the economy fully back on track. Private-sector members of the Council on Economic and Fiscal Policy have urged tax cuts to accompany curbs in spending in an effort to goose up corporate profits and personal consumption.  

Finance Minister Masajuro Shiokawa, however, said cutting taxes soon is a tough prospect given the revenue shortage. ``We need to make it clear where the revenue would come from if we cut taxes,'' he said. Liberal Democratic Party lawmakers who favor economic recovery through spending on public-works projects also oppose Koizumi's cuts. So-called resistance forces in the LDP are also tightening their grip on Koizumi.

Makoto Koga, chairman of the LDP's Research Commission on Highways, called on Koizumi to slash spending in areas other than public works projects. Economist Kirishima says Koizumi's directive Friday indicates that across-the-board cost-cuts are in store.

``It will have no effect on the economy if Koizumi impartially cuts spending for these areas. What is really needed to bolster the economy is to increase spending in one or two promising areas, while drastically cutting back in unnecessary fields,'' he warned. 

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