The government budget for fiscal 2001 is shaping up now that the Finance Ministry has received requests from all ministries and agencies. Their estimates, which include debt payments and revenue transfers to local governments, total about 84.8 trillion yen, down 0.2 percent from the initial budget for fiscal 2000. The budget will be completed in December following ministry screening.
The drop in the level of appropriations requests does not mean that government offices are moving toward austerity, nor does it signal any real easing of the debt burden. It reflects a temporary change in debt service: The annual bond servicing cost will shrink by more than 16 percent as a result of the termination of emergency payouts for banking reform. Debt payments will still make up about one-fifth of total expenditures, however.
Ministries and agencies are as keen as ever to boost spending. The requests for operating expenses, totaling 48.4 trillion yen, represent a gain of 2.1 percent from the initial 2000 budget. In the case of projects related to Prime Minister Yoshiro Mori’s “Japanese renaissance plan,” the amount of money requested exceeds the Finance Ministry ceiling by 130 percent. The amount for living-related programs, which are no longer subject to such limits, is 3.2 times what it was a year ago.
The pattern revealed by the estimates remains basically unchanged. There continues to be a heavy emphasis on traditional large-scale construction projects. Politicians and bureaucrats pushing for these public undertakings do not seem much worried about the fiscal crisis. While not all requests will be accepted in their entirety, the lack of a willingness to cut spending is all too apparent.
Now is the time to reaffirm the long-term need for fiscal discipline. A recent Liberal Democratic proposal to amend the Fiscal Law — designed to issue “construction bonds” for projects other than public-works programs — was an invitation to indulge in fiscal laxity. It is good that the plan fell through. But pressures for increased bond issues remain strong. Mr. Mori is leading a government-business drive to pump more money into the information and communications sector.
In fact, the budget now in the making gives top priority to projects related to information technology, which is seen as the prime catalyst for economic rebirth. The aborted LDP plan would have revised the law and allowed the issuance of bonds for the construction of fiber-optic networks — a move that would have opened the floodgates for public-investment bond issues. The party was right to promote Internet projects, but erred in the method of financing them.
This is not to say that public funds should not be used for IT projects. The point is that such programs should be funded without amending the Fiscal Law. Japan is falling far behind the United States in Internet use and other related areas. It also lags behind South Korea and Singapore. So there is good reason to spend public money for nationwide fiber-optic networks and other IT-related projects.
But funding for traditional public-works projects, such as road and dam construction, must be drastically reduced. The need for spending cuts is obvious, not only because many projects have proved inefficient and even useless, but also because quite a few have destroyed local environments and many others threaten to do so. Yet politicians and bureaucrats with stakes in “national land development” remain in the saddle.
Japan has the worst fiscal situation of any major industrialized nation, with the central and local governments holding a combined debt of 650 trillion yen, a sum considerably larger than the nation’s gross domestic product. Shaving the debt will require drastic changes on both the revenue and spending sides. Those changes can be made only with political determination and public understanding.
The Mori administration is giving top priority to economic recovery, but it would be naive to think that the deficit problem will work itself out through economic expansion. The budget gap is so wide that it is unrealistic — if not reckless — to count on a virtuous business cycle to do the trick. To be sure, an economic upturn will generate more tax revenue and reduce the deficit, but probably not much. Somewhere down the road the people will have to accept tax increases and benefit cuts.
The road to a balanced budget promises to be long and tortuous. But the government can set at least an interim goal to achieve a “primary balance” by eliminating “deficit bond” issues that will cover operating expenses. To that end, it is essential to lift the moratorium on the Fiscal Structural Reform Law of 1997, which aims at bringing such debt issues to zero.
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