Japan fiscal blueprint to propose flexible spending on annual basis

TOKYO (Reuters) - Japan's government will release a fiscal blueprint on Monday that will recommend taking a flexible approach to limiting state spending rather than setting a rigid cap on the annual increase to reduce the government's mountain of debt.

A copy of the final draft, seen by Reuters on Monday, recommended limiting rises in general account spending to 1.6 trillion yen ($13 billion) for the three years to March 2019, but stopped short of calling for a mandatory cap on spending.

The absence of a binding cap could raise concerns that the government would be tempted to spend more if economic growth falters, increasing a public debt burden that is already more than twice the size of its $5 trillion economy and the largest of any advanced nation.

The government has also set a goal of keeping GDP growth above 2 percent in real terms and 3 percent in nominal terms, according to the draft.

Policymakers are torn between banking on faster economic growth to increase revenues - as Prime Minister Shinzo Abe hopes - or exercising greater fiscal discipline to reduce the pressure on debt.

"The government is operating on the assumption that economic growth does well and tax revenue really starts to take off," said Norio Miyagawa, senior economist at Mizuho Securities.

"This is admirable, but when you look at our public finances, you would think a little more effort should be put into cutting spending."

The draft will be submitted to Abe's top economic advisory panel, the Council on Economic and Fiscal Policy, later on Monday.

The new guidelines, which will be used to compile next fiscal year's budget, reiterate the government's goal of returning to a primary surplus in fiscal 2020.

The draft does set an interim target of reducing the primary deficit, which excludes debt servicing and revenue from new debt, to 1 percent of gross domestic product in fiscal 2018.

The draft also calls for limiting gains in welfare and healthcare spending by 1.5 trillion yen over the next three years.

However, some economists would argue that Japan needs to cut welfare spending, instead of simply slowing its annual increase, given Japan's rapidly ageing society.

(Writing by Leika Kihara and Stanley White; Editing by Simon Cameron-Moore)