Staff writer The 85 trillion yen fiscal 2000 state budget, approved by the Cabinet Friday, will put the nation deeper into debt. How serious is the debt and what can be done about it? Here are some questions and answers about the new budget and government debt: Why did the government prepare an aggressive budget for a second year in a row? Economic recovery is the government's short-term priority over debt reduction. Finance Minister Kiichi Miyazawa said this will be the final expansionary budget to normalize the economy. As a backdrop, politicians cannot ignore a looming general election, which must be held no later than next October. How big will the government debt grow? Some 33 trillion yen in bonds will be newly issued in fiscal 2000. The accumulated outstanding bonds are estimated to reach 364 trillion yen in March 2001. The gross debt of the central and local governments combined will expand to an estimated 647 trillion yen, exceeding the size of the nation's gross domestic product by 30 percent. Japan has the worst fiscal situation in the industrialized world. What is bad about government debt?It has to be paid back with interest. The annual state budget includes debt servicing to redeem bonds and pay interest. Interest payments alone will total 10.7 trillion yen in fiscal 2000, accounting for 12.6 percent of the state budget. Including capital payments, debt-servicing accounts for a quarter of the latest budget, leaving shrinking room for policy programs. Imagine a person who has no choice but to cut down on living expenses to repay a debt. The government debt will pose an increasingly serious problem as the nation's population ages -- fewer children and more old people. Social security spending is almost certain to rise while the economy is unlikely to grow dramatically. What if the government just keeps borrowing? A glut of government bonds in the market may trigger a rise in long-term interest rates. Higher interest rates can hurt business activity by raising borrowing costs. Higher rates will also inflate government interest payments, which have been leveling in recent years thanks to the super-low interest. Also, a hopelessly swollen debt may corrode investor confidence in government bonds, a situation that will drive interest rates up to attract investors, making a vicious circle. Does the issue of interest rates relate to the heated debate early this year about whether the Bank of Japan should buy government bonds? Yes. Political pressure may mount again on the central bank to do so to check a rise in interest rates. Critics warn that such a move could cause dangerous inflation by providing easy money for reckless government spending. Doesn't it make sense for the government to stimulate the economy to secure tax revenues?Not necessarily. According to a simple simulation by the Finance Ministry, even if the nominal GDP grows 3.5 percent until fiscal 2003, tax revenues will increase by only 1 trillion yen to 2 trillion yen each year. The figure is marginal compared with the 33 trillion yen in bond issues and 22 trillion yen in debt-servicing in the 2000 budget. An economic recovery will also push up interest rates as companies try to borrow more for investments in plants and equipment. Even if that does not stop the recovery, the government debt-servicing will certainly surge. In short, the fiscal situation will not improve even if the economy recovers. Is there no way out? The only rational way to reduce the huge debt is to increase revenues and cut spending. Indeed, many people believe some kind of tax hike is unavoidable, particularly in the consumption tax. Many also recognize the need to slash spending, especially in seemingly inefficient projects and government personnel costs. But the timing for a policy shift is debatable. Leading policymakers, including Miyazawa, believe this is not the right time. Yet some economists argue that a reliable austerity policy may even encourage consumption when the government has a huge debt, because people will not expect as large a tax increase as otherwise. A question for the next few years is when will the belt-tightening Fiscal Structural Reform Law -- frozen since last December only a year after its enactment -- be revived and reinforced?