The forthcoming Lower House election will test the economic policies of political parties more severely than did previous general elections. The reason is obvious: While industrial restructuring and economic recovery are making only slow progress, the national debt burden has reached a staggering 650 trillion yen — a sum larger than even the nation’s gross domestic product. Mapping out a credible blueprint for fiscal reform is now an urgent priority. Without deficit-cutting plans, slogans of “economic revival” sound hollow.

The question is how to promote both economic growth and deficit reduction, and not one or the other. But political parties have yet to present a realistic program to achieve these twin objectives. The hardest part is making a road map for fiscal reform that does not include major tax increases. In the short run, calls for erasing public concern about a rise in the tax burden will help get votes. In the long run, however, that would do a disservice to efforts to restore a healthy budgetary balance.

During the past decade, all successive Cabinets have followed essentially the same “spend now, pay later” policy that has focused on stimulating the economy. The assumption was that deficit spending would in due course generate sustainable growth and raise tax revenues sufficiently to allow the government to more or less balance the budget.

On that basis the government has pumped tens of trillions of yen into the economy. But the stimulus spending has done little to spur growth; instead, it has inflated the debt while economic stagnation has stunted the growth of tax receipts. That has made the 1990s a “lost decade” for Japan. Japan has failed to achieve both economic recovery and deficit reduction.

In this regard, the experience of Northern European countries — which also saw their economic bubbles burst at the beginning of this decade — offers useful lessons. Like Japan, Sweden, Norway and Finland injected huge amounts of taxpayers’ money into their troubled banks. At the same time, however, they made drastic spending cuts to bring their budget deficits under control. As a result, Sweden and Finland suffered three straight years of negative growth beginning in 1991.

To prevent a vicious cycle of economic stagnation and fiscal deterioration — the cycle that occurred in Japan — the three nations invested aggressively in education and in Internet-induced industrial reform. They embraced the information-technology revolution five years ahead of Japan.

Cell phone and Internet use in Northern Europe — which gave birth to global telecommunications companies there — are the highest in Europe. These Northern European nations has pushed job-creation programs, such as worker retraining, to adapt their labor markets to the needs of the IT revolution. Their budget deficits are now low enough to qualify for entry into the euro monetary system of the European Union.

The message here is that the governments of the three states have given their citizens hope for IT-driven national prosperity and, by pursuing policies to realize those hopes, have fostered a forward-looking public that accepted the immediate hardships of negative growth as stepping stones to a better future. Their governments, in other words, laid out before their publics both the negative and positive effects of their policy prescriptions, and assured them that, in the long run, the positive far exceed the negative.

The Northern European experience tells us that spending cuts are indispensable to any fiscal reform that precludes major tax hikes. Public-works outlays of the kind that would retard industrial reform must be drastically curtailed. What is needed is zero-base budgeting for all existing programs, including defense. Given the right order of priorities, spending cuts will not necessarily entail an economic contraction.

The IT revolution is a common campaign theme of the political parties. To give it a big push, however, it is necessary to make national efforts for institutional and regulatory reform in a broad range of fields. A key step in this direction is bringing down the internationally high NTT interconnection fees, though the negotiations for this purpose are proving difficult.

Calling for spending cuts at election time demands as much political courage as calling for tax increases. But election promises of an “economic revival” that shy away from budget economies cannot convince voters. Japan’s economy would have been in much better shape than it is now parties and politicians had made this top-priority problem a major issue in the last general election four years ago, and if the taxpayers had handed down their verdict on that issue with their votes.

In a time of both misinformation and too much information, quality journalism is more crucial than ever.
By subscribing, you can help us get the story right.