The Finance Ministry’s budget for fiscal 2001, which was announced last week, falls far short of expectations, particularly because it does not lay out a road map for fiscal reform. It seems as if the ministry is marking time along with the stagnant economy. Critical issues, such as spending cuts, deficit reduction, revenue reallocation and economic stimulation, have been put on the back burner.
The bloated budget deficit, by far the largest of any industrialized nation, raises a troubling question: Will Japan be able to maintain its hard-won status as the world’s second-largest economy? Indeed, the sorry state of the budget makes one wonder whether this nation will not slip to third place behind some fast-emerging economy.
It is hard not to avoid a comparison with the United States, which wiped out its chronic federal budget deficit in 1998. That country’s budget surplus is now estimated to reach $2.2 trillion (242 trillion yen) in the next 10 years. President-elect George W. Bush reportedly stands by his campaign promise to cut taxes by $1.3 trillion over the next 10 years. It is a pledge that Japan’s fiscal authorities can only dream about.
The ministry’s budget estimates total 82.6 trillion yen, down 2.7 percent from the fiscal 2000 initial budget, the first drop in six years. However, this is not the result of spending cuts, but is due solely to a technical factor: the removal of the 4 yen.5-trillion safety net for financial failures. The money saved is a one-off windfall that has nothing to do with budget reform.
The positive side is that bond issues will be reduced significantly. This, combined with an estimated 2 trillion yen or more in increased tax revenues, will bring down the ratio of bond dependence — debt issues as a percentage of total revenue — to 34.3 percent from the present 38.4 percent. Still, the bond ratio is extremely high, even though the growth in borrowing has at least come to a halt.
The lower debt ratio is no cause for complacency. The total amount of outstanding government bonds is estimated to reach 390 trillion yen at the end of fiscal 2001, an increase of 25 trillion yen from fiscal 2000. As a result, the nation’s long-term public debt, including that owed by local governments, will hit an astronomical 666 trillion yen, or 1.3 times the gross domestic product.
There is no evidence, however, that fiscal authorities have done anything effective to defuse the ticking debt bomb. It is encouraging that as many as 272 public-works projects will be discontinued, shedding a total of 2.6 trillion yen in future project costs. But there is still pork galore, such as generous outlays for expressway and shinkansen construction projects.
Another positive feature is spending on projects related to the information-technology revolution, which is seen as the catalyst for economic expansion. However, the money earmarked for this purpose — 250 billion yen — accounts for just 0.5 percent of policy-based expenditures, although it makes up more than one-third of the funds allocated for the so-called Japanese Revival Plan, the brainchild of Prime Minister Yoshiro Mori.
The need to stimulate growth goes without saying. But structural reform should not be delayed in the name of economic recovery. Fiscal policy should also be used as an instrument for long-term reform, such as developing new industries that will lead the future economy and restructuring the “old economy” supported by old-line industries into a “new economy” led by information technology and other cutting-edge innovations.
Three years ago, during the administration of Prime Minister Ryutaro Hashimoto, the Diet passed a law mandating fiscal structural measures, such as limiting the budget deficit to no more than 3 percent of GDP. However, as the economy slipped deeper into a slump and a number of major financial institutions went bankrupt, that belt-tightening legislation came under heavy criticism. It was put on hold during the next administration.
The episode must have deeply wounded the pride of Finance Ministry bureaucrats. Their confidence, it seems, has also been eroded by the coming government shakeup, starting next January, that has stripped the ministry of some of its long-held functions, such as overseeing financial institutions. Moreover, the recent spate of scandals involving ministry officials has created a new crisis of confidence in what was once dubbed “the ministry of ministries.”
No matter what those elite bureaucrats may feel, the fiscal crisis is pushing this nation ever closer to the precipice. Fiscal reform is an urgent priority. Yet this seems like a classic case of “once burned, twice shy.” It is time for the government to start acting boldly. The taxpayers also must be prepared to take some bitter medicine.
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