Highly conscious of public criticism of the role played by public-works projects in its politics, the Liberal Democratic Party is overhauling the much-maligned system. The party is supposed to be trying to phase out programs that have outlived their usefulness and to classify those related to information technology as public-works projects. This is being taken with a grain of salt because public spending on IT-related projects could also encourage pork-barrel politics and further inflate the budget deficit.
There is no doubt that various civil-engineering projects under way are out of tune with reality. Phasing them out is an essential part of fiscal reform. Mr. Shizuka Kamei, the LDP’s chief policy planner, says that controversial projects like dam construction and land reclamation should be called off. The policy change is certainly a step in the right direction.
But the panel also believes that so-called construction bonds should be issued to finance IT-related projects. These debt issues are designed primarily to fund large-scale projects such as dams, roads, airports and harbors. With the need for these traditional projects diminishing, however, it stands to reason that the money should be used for projects that improve the nation’s industrial structure.
There is no assurance that this will happen, however. Public-works projects remain a major source of political power, particularly for Liberal Democrats. Scrapping projects steeped in vested interests without providing offsetting programs could cost them many votes. It is not hard to imagine, therefore, that those calling for a shift from civil-engineering to industrial development have an ax to grind.
Land-reclamation projects, for example, are under attack from residents who are concerned about environmental fallout. Cancellation of these expensive undertakings would create a big hole in the public-works budget. The gap could be closed if industrial infrastructure projects were included in that budget.
Lawmakers play a large role in the annual allocation of public-works funds. The inclusion of IT-related outlays would not only make up losses of pork at their disposal, but could even increase appropriations. Drumming up support for unpopular projects is political suicide, but there is no opposition to building information and communications networks. Presumably, that is why politicians are trying to change the rules for the issue of construction bonds.
The argument that IT projects should be handled as public-works projects is basically correct. Currently, a program to set up computers at public schools, for example, is not classified as a public-works project. In the corporate sector, spending on computers — fixed assets that depreciate over a period of time — is treated as a capital expenditure. There is no reason why bond revenue should not be used for school computer programs. A strong case can also be made for giving public-works treatment to projects that lay fiber-optic cables for high-speed communications.
The bottom line is that expanded use of construction bonds should expedite industrial structural reform and that bond issues for IT-related and other new public projects should be kept within reasonable bounds. At the moment, it is not clear how the LDP plans to prevent runaway borrowing. Central-government public-works projects are financed almost entirely by construction-bond revenue. In fiscal 2000, these debt issues make up 9.1 trillion yen of the 9.5 trillion yen project budget.
The government started issuing construction bonds in the mid-1960s to meet the growing demand for public investment. Since then, these IOUs have increased sharply with the blessing of political parties, particularly the LDP. The debt has snowballed for another reason: The Finance Ministry has been less than willing to cap the borrowing because these bonds do not mature for 60 years.
But it is not only construction bonds that inflate the budget deficit. “Deficit bonds,” also known as “special bonds” — which are issued to cover operating expenses — have contributed, too. Of course, both types of bonds are essentially the same, since both are debt issues. Yet deficit bonds have taken the brunt of deficit reduction largely because there has been much less pressure, political or otherwise, to reduce construction-bond issues.
Now that it is becoming even harder to increase deficit bonds, one wonders whether politicians are not seeking an excuse for floating more construction bonds by expanding the scope of public-works projects. The project review now in the works will not derail the drive for fiscal reform, particularly as the budget-making initiative is now shifting to politicians.
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