Action 27. A Roadmap for Fiscal Reconstruction

Japan’s long-term debt has finally topped 1,000 trillion yen, which is double the country’s GDP. The finances of the Japanese national government, which were in extremely good shape right up until the collapse of the bubble economy, worsened during the “two lost decades.” Government spending swelled by 30 trillion yen while revenue shrunk by 20 trillion yen, and the government came to rely on debt to make up this shortfall of 50 trillion yen. But the solution to this problem is very simple: reduce spending by the 30-trillion-yen increase and boost revenue by the 20-trillion-yen decrease. That is the only way to fix things.

1. Expenditure Reform: Slash Social Security Expenses

The main factor behind the 30-trillion-yen rise in that Japan’s general expenditure during the last 20 years is the increase in spending on social security. Of the 96.3-trillion-yen budget for the general account in fiscal 2015, 31.5 trillion yen, or 32.7%, went on social security. And this is more than 40% of the primary balance, which excludes expenditures relating to government bonds, i.e. the payment of interest on bonds and their redemption. It can be said that unless social security spending is reduced, fiscal reconstruction is impossible. Cutting social security expenditure is the key to reducing government spending, and the most important thing to do will be to create a mechanism for limiting increases in such spending and to actually cut such spending. (Action 29)

2. Revenue Reform: Economic Revitalization is the Key to Fiscal Reconstruction

20 trillion yen in tax revenue has vanished during the last 20 years, and the reason for this is the poor performance of the economy. Tax revenue, which was 60.1 trillion yen in 1990, dropped to 42.3 trillion yen in 2013. To make fiscal reconstruction a success, reforms that leave no stone unturned will need to be implemented to reduce spending. It will also be extremely important to ensure that the economy is successfully revitalized. (Action 31)

3. Administrative Reform: Transform Spending by Reforming Independent Administrative Corporations, Government Procurement, Special Accounts, etc.

“Mechanisms that structurally generate waste” must be reformed immediately. The first target should be the independent administrative corporations. There are 101 of them, and they consume approximately 3 trillion yen in tax revenue. They are not making independent efforts to eliminate waste and operate more efficiently, and they are opaque and not subject to fiscal discipline. The next target should be government procurement. Of the 7-trillion-yen worth of government contracts, around 20% are still negotiated contracts that aren’t subject to competition. Moreover, because each ministry and agency conducts its procurement independently, the prices paid are frequently high. The final target should be the special accounts. Although repeated improvements have reduced the number of special accounts to 17, spending under these accounts has swollen to 195 trillion yen (total net expenditure), which are more than double that under the general account. The structures themselves that are generating this waste need to be reformed. (Action 30)

4. Introduction of a Mechanism: Build a Mechanism into the Government for Increasing Revenue and Reducing Expenditure

Local governments, which have been implementing fiscal reform for some time, can provide clues for such reform at the national level. Chiba City has achieved structural reform by taking the knife to its bloated collection of administrative services, reducing schemes and subsidies for the elderly, which had been serving vested interests, while also cutting employee salaries. Osaka City, meanwhile, has basically scrapped its systems of subsidies and grants, which had fostered wastefulness and free riding.

The national government needs to take a lesson from these local success stories by basically scrapping aid, subsidies, and grants. If assistance needs to be provided, a voucher system should be introduced to support users and allow them to make choices. In addition, each organization needs to be made financially independent, and organizations that cannot survive (i.e. are not chosen) need to be broken up or amalgamated.

Furthermore, the system of local allocation tax grants is also structured so as to encourage free riding in the relationship between the national government and local governments. To turn it into a mechanism whereby local governments apply ingenuity to compete with each other to increase revenue and reduce expenditure, tax resources need to be transferred to local governments, which also need to be given taxation autonomy, which would include the power to set tax rates. (Action 28)

No clever ideas are needed for fiscal reconstruction. What should be done is increase revenue and reduce expenditure, with every area of spending a possible target. The government should swiftly articulate and follow a roadmap for fiscal reconstruction.