By Tetsushi Kajimoto
TOKYO (Reuters) - Japan should aim to trim the country's primary budget deficit by more than its initial target of some $40 billion (£24,457,352,491) each in the coming two fiscal years as a step to meet its budget balance goal, a key advisory panel to the finance minister said on Friday.
Tokyo is committed to halving the budget deficit, excluding debt servicing costs and new bond sales, by the fiscal year to March 2016, and achieving a surplus by fiscal 2020/21 to fix its tattered public finances.
With public debt at twice the size of Japan's $5 trillion economy -- the highest in the industrialised world -- Prime Minister Shinzo Abe must steer a delicate balance to stimulate near-term growth and rein in public debt in the long run.
Abe is overseeing Tokyo's most ambitious effort in recent memory to recharge the world's third-largest economy after nearly two decades of stagnation.
With the Bank of Japan embarking on a massive asset-buying campaign since April to spark inflation and the government ratcheting up spending to stimulate growth, experts have urged the government not to ignore the mounting debt pile.
In October, Abe decided to implement the first stage of a two-step plan to double the tax on consumers to cope with ballooning welfare costs.
Tokyo plans to raise the sales tax in April to 8 percent from the current 5 percent to pay for social security in a fast-ageing society. The panel has also sought the smooth implementation of a further tax hike to 10 percent in October 2015 as planned.
The fiscal panel's proposal is part of a process for preparing a draft annual budget for the next fiscal year from April, to be compiled by the government in late December.
The panel called on the government to curb spending "without taking any sacred cows" on budget cuts, citing medical spending and fiscal transfer to local governments among key areas needed to be streamlined.
Budget requests from ministries hit a record 99.3 trillion yen ($971 billion) for fiscal 2014, compared with 92.6 trillion yen earmarked for the current fiscal year, suggesting the government could face stiff hurdles in resisting calls for spending.
"If budgets for each area grow, the government would face criticism from the public for misappropriating the increased sales tax revenue and lose trust in its fiscal management," the panel said in the proposal handed to Finance Minister Taro Aso.
"We must press ahead with fiscal consolidation now, without being complacent about the current situation where long-term interest rates remain low while the Bank of Japan is carrying out massive JGB (Japanese government bond) purchases."
The government is expected to compile an extra budget next month to fund a stimulus package worth around 5 trillion yen aimed at offsetting the blow from the planned sales tax hike.
The panel called for a rigid assessment of the stimulus spending as sources of its funding such as higher-than-expected tax revenue and budget reserves should primarily be used for reducing debt issuance to ensure the fiscal goal.
($1 = 102.2150 Japanese yen)
(Editing by Shri Navaratnam and Chang-Ran Kim)