TOKYO (Reuters) - A finance ministry's key fiscal panel has called for drastic steps to cut government spending and secure revenue to meet Tokyo's aim of halving the primary budget deficit next year, a draft proposal showed, describing the goal as "quite difficult".
The draft recommendation, seen by Reuters ahead of its submission to Finance Minister Taro Aso later this month, underlines a tough balancing act between reining in snowballing public debt and pulling the world's third-largest economy out of recession.
It provides a basis for the government's process for compiling next fiscal year's draft budget in January.
The draft proposal highlights the need for Prime Minister Shinzo Abe to continue efforts to restore Japan's finances, even after his decision to postpone next year's planned sales tax hike by 18 months.
The tax hike delay will leave a revenue shortfall of 1.5 trillion yen (8.14 billion pounds) in the state budget for the fiscal year from April 2015, making it hard to halve the primary budget deficit, excluding new bond sales and debt servicing, it said.
Japan aims to achieve a primary budget surplus by the fiscal year to March 2021 as a step to curb its public debt, which is more than twice the size of its economy, by far the worst in the developed world.
"If achieving even the interim target is in doubt, the government could lose market trust in its economic and fiscal management," the panel warned. "It would be meaningful to achieve the target by thoroughly cutting spending and securing revenue."
The draft proposal stressed the need for the government to raise the sales tax to 10 percent from 8 percent in April 2017. It urged the government to present concrete steps by next summer to return the primary budget balance into the black by fiscal 2020/21.
The government's own projections showed earlier this year that Japan would be 11 trillion yen short of the budget-balance goal even on a rosy assumption that the economy grows 2 percent and the sales tax had been raised to 10 percent next year.
The government usually compiles the state budget for the next fiscal year by year-end. But Abe's decision to call a snap election in December has led to a delay in the process.
Reporting by Takashi Umekawa; Writing by Tetsushi Kajimoto; Editing by Jacqueline Wong