The government and the ruling parties agreed Friday to propose a tax hike to achieve a primary budget surplus -- which excludes new bond issues and debt-servicing costs -- by fiscal 2011, government and party officials said.

The government also said an estimated 16.5 trillion yen shortfall must be covered to meet the fiscal target, down from an earlier estimate of 17 trillion yen announced June 12. The downward revision reflects projected cost savings arising from the June 14 enactment of health-care reform bills.

The new legislation will raise the share of health-care costs borne by the elderly and restructure hospitals.

But despite underscoring the need to explain to taxpayers that the government must cut its snowballing debt, the working-level meeting did not decide whether the consumption tax or other taxes should be raised to plug the hole in the budget.

The government and the ruling coalition, made up of the Liberal Democratic Party and New Komeito, also agreed that annual grants from the central government to localities should be capped at the fiscal 2006 level until fiscal 2011 -- effectively a cut since the government expects tax revenues to rise during that time. They also agreed the government should continue to cut public works spending at the current pace of 3 percent a year.