TOKYO (Reuters) - Japan will meet its target of halving the primary budget deficit in fiscal 2015 due to a spending cap and a sales tax increase but will have to tighten fiscal policy further to eliminate the deficit in fiscal 2020, the Cabinet Office said on Friday.
The ratio of the primary budget deficit to gross domestic product will reach 3.2 percent in fiscal 2015, which is half of the level estimated for fiscal 2010, according to the Cabinet Office.
Unless the government takes new policy steps, this ratio will fall to 2.8 percent in fiscal 2020, short of the goal of a primary surplus. New borrowing would also rise to 52.5 trillion yen ($668.4 billion) in fiscal 2020, highlighting the need for stronger measures to improve public finances.
Japan has already been hit by a string of credit downgrades because of concerns that it was not doing enough to curb its debt burden, the world's largest at twice the value of its annual economic output.
Japan is able to meet its short-term targets as it has decided to extend a 71 trillion yen cap on spending and a 44 trillion yen cap on new debt issuance to fiscal 2015, according to a Cabinet Office official.
Public finances will also improve somewhat as the government has passed bills to double the sales tax to 10 percent by 2015 to help offset rising welfare spending.
After fiscal 2015, the pace of improvement in public finances would slow, leaving Japan with a primary budget deficit worth 15.4 trillion yen in fiscal 2020, according to the Cabinet Office.
A primary budget balance excludes income from the sale of government debt and the costs to service existing debt.
If the government tried to fund this primary budget deficit entirely with sales tax revenue, the sales tax would need to rise another 5.7 percentage points, according to an estimate from a Cabinet Office official. ($1 = 78.5500 Japanese yen)
(Reporting by Stanley White; Editing by Chris Gallagher)