In June, the Cabinet Office’s Council on Economic and Fiscal Policy stressed the need for smaller and more efficient government in its 2005 basic guideline for economic and fiscal reform. Earlier this month the fiscal 2005 Annual Report on the Japanese Economy and Public Finances also called for smaller government and the transfer of more activities from the public to the private sector.
In view of the nation’s huge debts and the financial pressure anticipated as medical, pension and other social security costs increase with the rapidly advancing age of the population, it is indispensable to reduce or get rid of waste and inefficiency in the operations of the central and local governments. Now may be just the time to adopt a bold way of thinking that will be useful in carrying out drastic cuts in spending — to the tune of, say, 10 trillion yen or 20 trillion yen annually.
Debts owed by the central and local governments have reached 700 trillion, yen or 1.6 times the nation’s gross domestic product. If debts owed by corporations with a special semigovernmental status are taken into account, the amount is believed to be as high as 1,000 trillion yen. The government appears inclined to rely on large tax increases to make up for government revenue shortfalls. But this will certainly sap vitality from the Japanese economy.
In fact, the Fiscal System Council in the Finance Ministry has estimated that, to achieve a primary balance in the national budget in fiscal 2015 — a condition in which revenues (excluding borrowed money) and expenditures (excluding debt service) are balanced — either expenditures must be slashed by 30 percent or the consumption tax rate must be raised to 19 percent. Thus the idea of cutting expenditures by 10 trillion yen or 20 trillion yen annually should not be discarded out of hand.
As the fiscal emergency nears, proposals and ideas put forth by Koso Nippon (Japan Initiative), a think tank composed of private sector researchers, offer food for thought. The think tank calls for thorough reviews of central and local government activities. It asks three questions concerning the activities: Are they necessary? If necessary, which sector — public or private — should take charge of them? If they should be taken care of by the public sector, should the central, prefectural or a municipal government do so?
The think tank carried out the test in eight prefectures and four cities, asking local government workers for their opinion. Most prefectural government workers surveyed said 40 percent of activities carried out by their prefecture either are unnecessary or could be delegated to the private sector. The corresponding figure for city governments’ activities was 30 percent.
If these figures were applied to the nation as a whole, it would be possible to slash the total expenditures of all local governments by at least 10 trillion, yen or 10 percent, annually. Japan Initiative says if efforts were made to reduce unit costs in public-works projects ordered by local governments, the effect from economizing would be larger. A reduction in the total expenditures of local governments would also mean a reduction in the amount of subsidies they receive from the central government.
The same rigorous reviews applied by Japan Initiative to local governments should also be applied to the budget requests of central government ministries and agencies. A strict inquiry should be made into the wasteful use of taxpayers’ money as symbolized recently by the allegations of longtime bid-rigging in large-scale projects involving bridge builders and by the construction of commercially unsustainable resorts by the Social Insurance Agency.
Japan Initiative’s reviews of the activities of 10 central government ministries and agencies show that 45 percent of the activities are unnecessary. The central government also could reduce unit costs in its public-works projects. In view of Japan Initiative’s proposals and the room for economizing, it may not be unreasonable to demand that the government set the goal of reducing the amount comprising general expenditures plus tax-revenue transfers to local governments by 10 to 20 percent.
In the field of social welfare, wastefulness in medical services, for example, must be tackled. Still, the central government’s using the call to reduce wastefulness and inefficiency as an excuse for making deep cuts in social welfare benefits would be wrong. Taxpayers are probably ready to shoulder reasonable increases in their tax burden in the midst of a financial crisis. Yet the government must tackle a number of issues before resorting to tax increases — such as how to streamline administrative work and organizations and reduce the public-servant surplus, while axing certain public works projects and transferring some activities to the private sector.
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