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Prime Minister Junichiro Koizumi’s structural reforms for creating a “simple, efficient government” have entered the final phase. In late May, the Diet enacted the administrative reform promotion law and four related bills aimed at continuing Koizumi’s reform programs after he steps down in September (when his tenure as president of the governing Liberal Democratic Party ends).

At the same time, the council for integrated fiscal and economic reforms, made up of top government and ruling-coalition officials, was inaugurated to take over the nation’s policymaking power from the Cabinet’s advisory council on economic and fiscal affairs.

While the latter was a decision-making body based on Koizumi’s top-down political style, the new body is more apt to reflect the views of the ruling coalition.

This signals a change in the political dynamics of structural reform, stemming from the growing power of the LDP and its coalition partner, New Komeito. The two parties together grabbed more than two-thirds of the Lower House seats in the autumn 2005 general election.

The new council (prime minister, chief Cabinet secretary, major Cabinet ministers and senior officials of the LDP and New Komeito) will set basic policies for the nation’s economic management.

The government and the ruling coalition are pushing plans to achieve a primary-balance surplus for the national and local governments by 2011. According to estimates by the Cabinet’s advisory council, 20 trillion yen is required to eliminate revenue shortfalls.

The new council has agreed that more than half of the revenue shortfalls should be covered by cuts in expenditures. However, the government and the ruling coalition have yet to agree on specific measures for cutting expenditures by as much as 10 trillion yen.

A Cabinet decision on a basic policy package for economic and fiscal management and structural reforms, originally set for June ahead of the compilation of the fiscal 2007 government budget, is likely to be delayed till July.

The LDP is beginning to have more say on reform policies, having established a project team for overhauling expenditures in five areas. Within the LDP, though, talks on budget-cut measures are encountering difficulty. The focal issue is how much to trim social-security expenditures, which amount to 20 trillion yen or a quarter of the government budget.

Reductions in social-security expenditures would lead to increases in personal expenditures for medical and nursing care. Furthermore, the proposal to cut public works investment by 3 percent annually over five years would hurt local economies dependent on such investment.

Proposed cuts in tax revenues allocated to local governments would lead to wider financial divides among them. With local elections scheduled next spring and Upper House elections next summer, there is growing resistance among LDP lawmakers to cutting expenditures.

Since it will be impossible to cover revenue shortfalls only with expenditure cuts, debate on tax hikes, especially a raise in the consumption tax, is unavoidable. With elections coming up, a tax hike is unlikely for the fiscal 2007 budget; instead, it is expected to be delayed to fiscal 2008.

Kaoru Yosano, the minister for economic and fiscal policy, has endorsed a proposal for using consumption-tax revenues only for social-security expenditures. Tax reform for averting a fiscal crisis as the population ages and birthrates fall is crucial.

Former Chief Cabinet Secretary Yasuo Fukuda, a potential contender for the premiership along with current Chief Cabinet Secretary Shinzo Abe, asserted last month that a raise in the consumption tax was the only viable option for balancing the budget. Fukuda, who is threatening to catch up with Abe in popularity ratings, said a 5 percent hike in the consumption tax would produce 12 trillion yen in extra revenue a year.

The comment was an apparent challenge to Abe, who argues that drastic cuts in expenditures should first be implemented in line with Koizumi’s reform plans. As the top spokesman for the Koizumi government, Abe is not in a position to push for a higher consumption tax. Fukuda has no such restrictions. By calling for a raise in the consumption tax, Fukuda, known for his cautious nature, has revealed a strong determination to seek the LDP presidency.

The administrative reform promotion law sets goals to be achieved in five to 10 years in various fields. The goals include a 5 percent cut in the number of central government bureaucrats by 2010, the consolidation and privatization of government-backed financial institutions, and the halving of the number of special accounts (now 31) in the government budget — which are in addition to the general-account budget — to produce 20 trillion yen in surplus revenue for restoring fiscal health. However, it will be up to the incoming administration to implement specific measures for achieving the goals.

Last year, the nation’s birthrate fell to an all-time low of 1.25 children per woman, and the population saw its first year-on-year decline. The government predicts the population will fall below 100 million in 2051. The proportion of people aged 65 and over, which exceeded 20 percent for the first time last year, is expected to top 35 percent by 2050.

With its falling birthrate and declining population, there are doubts as to whether Japan can remain economically competitive in the years ahead. A survey by a Swiss think tank shows Japan ranks only 17th in economic competitiveness among the nations of the world, with China and India close behind.

Koizumi’s reform agenda for creating “a simple, efficient government” merits praise as a policy goal. But it will be meaningless unless it engenders a socioeconomic system for comfortable living with less anxiety, based on a cost-benefit analysis. Candidates for the premiership must present a clear vision for the nation — beyond individual policy challenges — and demonstrate leadership for implementing related policies.

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