To improve Japan’s finances, reform drive must stay alive


In fiscal 2006, the government will issue under 30 trillion yen in bonds for the first time in eight years, leaving the nation 11.2 trillion yen short of achieving a primary balance — the condition where expenditures, excluding interest payments and debt redemptions, are covered by revenues excluding bonds.

This is a major improvement from fiscal 2003, when the state fell 19.8 trillion yen short of a primary balance. In addition to recent efforts to make government expenditures more efficient, tax revenue has expanded, thanks to the economic recovery.

Still, Japan’s fiscal health remains in dire straits, and achieving the government’s goal of a surplus in the primary balance by the early 2010s will not be an easy task.

A recent estimate by the Council on Economic and Fiscal Policy shows that achieving a primary balance by fiscal 2011 without tax increases will require massive cuts to expenditures, including a 25-percent cut in public works-related spending. The estimate is based on the assumption that nominal GDP growth will rise to about 3 percent a year. If the GDP growth is to stay around 2 percent, further cuts to government expenditures will be inevitable.

From the viewpoint of sustainable fiscal management, the government should aim at not only improving the primary balance situation, but also at bringing down outstanding debt per nominal GDP, which has mushroomed to as high as 150 percent.

That’s still a tough hurdle to clear, given the current situation, but it’s an obstacle that must be overcome in order to maintain fiscal sustainability.

This year, the government has cited “reform of both expenditures and revenues in an integrated manner” as one of its policy priorities. It is scheduled to come up with specific choices and a road map to reform.

The Keidanren believes that it is essential for Japan to try to build a “small and efficient” government to maintain the nation’s economic vigor, and that the government should therefore pursue fiscal reconstruction while keeping the increases in the people’s burden to a minimum.

As for expenditures, the nation must first conduct a thorough review of public spending. No sector should be spared. The social security, local finance, public workers and special accounts systems should also be reviewed, accompanied by aggressive selling of government assets.

As for the revenue side, the tax system must be overhauled with a focus on maintaining economic vigor. As illustrated by recent tax revenue increases and an estimate by the Council on Economic and Fiscal Policy, brisk economic activity is essential to Japan’s efforts to regain fiscal health.

Efforts to increase tax revenue should rely largely on a hike in the consumption tax, which will have less negative impact on overall economic activity than hiking other taxes.

Japan’s corporate tax rates are still higher than those in other industrialized countries, and a fundamental overhaul is needed to put Japanese companies on an equal footing with their overseas rivals.

This is essential in order to create a positive cycle whereby improvements in corporate earnings and household income will result in more tax revenue for the government.