Greece’s fiscal collapse is still fresh in the mind. For Japan, which is encumbered with debt worth more than twice its GDP, the situation in Greece cannot be shrugged off as being someone’s else’s problem. However, the cases of countries such as Sweden and Canada, which have succeeded in fiscal reconstruction without experiencing a crisis, are less well known. In both these countries, a success factor was that they worked hard to reduce social security spending and built in a mechanism for reducing expenditure. We also needs to be willing to build a mechanism for cutting expenditure into the Japanese government.
1. Enact a Fiscal Reconstruction Act, Set Clear Numerical Targets for Fiscal Reconstruction, and State a Commitment to Improving the Health of the Country’s Total Balance Sheet
Fiscal reconstruction is unpopular with the public and brings pain with it. It can be said to be one of the topics that politicians facing elections wish to avoid. Therefore, to ensure that fiscal reconstruction is not delayed, it would be effective to establish a “Fiscal Reconstruction Act.” The act would include clear numerical targets for expenditure reductions and state that the government has an obligation to achieve them. It should also include provisions for compulsory expenditure reductions if the government fails to meet the targets. For example, a “GDP gap system” could be introduced whereby maximum expenditure or social security expenses move in line with GDP.
The act should not only include profit-and-loss side provisions, i.e. provisions for maintaining a balance between tax revenue and expenditure, it should also include provisions concerning the balance sheet. It would need to articulate a commitment to improving the soundness of the national balance sheet as a whole, which includes not only tax but also payments such as pension contributions and insurance premiums collected from citizens.
2. Concentrate the Authority to Allocate Budgets in the Prime Minister’S Office: Top-Down Expenditure Reduction
Under the current system, the Ministry of Finance is responsible for screening budgets. To facilitate bolder and more balanced budget formulation, a body for budget formulation needs to be established within the prime minister’s office. It will be necessary to eliminate resistance from ministries and agencies vying for funds and explain to the public the need to increase revenue and cut expenditure.
3. Provide Incentives to Ministries and Agencies to Reduce Expenditure: Bottom-Up Expenditure Reduction
Bureaucrats tend to do their utmost to secure budgets and express heavy resistance to reducing them. This problem is rooted in the system for public servants. Bureaucrats who increase their organization’s budget and the work it performs earn praise, win promotions, and become vice-ministers. This cycle needs to be reversed. An organizational reform needs to be implemented in which an incentive system is introduced bureaucrats who reduce their budgets and work are. A project screening mechanism should be established as an internal process for reviewing government projects by ministries and agencies, and a PDCA cycle for the budget should be incorporated into it, with the results being clearly reflected in the formulation of budgets for the next and subsequent fiscal years.
4. Scrap the System of Local Allocation Tax Grants and make Consumption Tax a Source of Funds for Local Governments. Revamp the System to Make Local Governments Compete with Each Other to Increase Revenue and Reduce Expenditure
At present, local governments received approximately 17 trillion yen in local allocation tax from the national government. To give each local government the incentive and freedom to increase revenue and reduce expenditure, one idea is to scrap the current local allocation tax system, make consumption tax a local tax, and give local governments taxation autonomy. The key point is to have local governments come up with ideas and make efforts to boost tax revenue and cut expenditure. Fukuoka City is endeavoring to increase tax revenue by invigorating its economy. For example, it is providing assistance to entrepreneurs. Meanwhile, Chiba City is reducing expenditure by boldly reforming its subsidy schemes. Under the current system, the heads of local governments are given too little freedom. Their motivation to come up with fresh ideas and work hard is being eroded. If the leaders of prefectures and municipalities become more like corporate executives, take risks, and strive to invigorate their regions, this will increase revenue for Japan as a whole and improve the fiscal situation.