日本財団 図書館


Toward Realistic Fiscal Reform
Toshihiro lbori
Professor of Economics,
University of Tokyo
 
Concern about the future of the U.S. economy is growing as the twenty-first century opens, and the American stock market has entered an adjustment phase. While uncertainty about the U.S. stock market increases, stock prices in Japan have taken a marked downturn. With the Nikkei stock average below \14,000, many financial institutions are suffering latent losses, arousing anxiety about possible instability of the financial system. The sense of crisis is reflected in a series of stock price boosting measures adopted by the ruling Liberal Democratic Party. Uncertainty about the future of Japanese economy can affect fiscal management, and a critical situation in public finance could have a detrimental effect on Japanese economy as a whole.
As long as interest rates are higher than the rate of economic growth, putting off fiscal reconstruction will only mean greater fiscal restraints in the future
Japan's fiscal situation is critical. The national debt balance exceeds 120 percent of the gross domestic product (GDP), and there are no signs of improvement in the flow of government revenues and expenditures. If fiscal management remains unchanged over the medium and long term, it is clear that Japan's government finances will eventually collapse. The reason that national bonds are nevertheless being consumed at a low interest rate on the bond market is because investors optimistically believe that the country's fiscal health will recover.
 It is not necessary to repay the entire government debt balance, which is expected to stand at \666 trillion as of the end of fiscal 2001. The government does have some financial assets of its own. It could also exercise its option to raise taxes and reduce expenditures. Should the government set to work in earnest to reconstruct its fiscal standing, it will be quite possible to restore the nation's fiscal management to a sustainable condition. The tax burden on citizens as a whole is actually rather light. Consumption tax, for example, is 5 percent, by international standards, the lowest anywhere. The potential for absorbing future tax increases is actually quite considerable: the economy would not buckle even if the consumption tax were raised to 15 percent.
 If the Japanese economy is not on a self-sustaining recovery track, however, adoption of policies for quantitative restraint now or in the near future are likely to meet with strong resistance from various political forces, which will in turn delay fiscal management reform. The further the delay in shifting to quantitative tightening, the larger in scale the quantitative restraints will have to be.
 That is because the debt increases commensurate to the rise in interest rates whereas tax revenues increase in pace with the growth of the economy. As long as interest rates are higher than the rate of economic growth, putting off fiscal reconstruction will only mean greater fiscal restraints are later needed. Specifically, the higher the ratio of debt balance to the GDP, the larger the surplus margin of primary balance that is needed to check the increase of debt-GDP ratio and maintain it at a certain level.
What is needed are not short-term policies to quantitatively shore up the Japanese economy but structural reforms that would enable the economy to revive in the medium and long run
An issue of public bonds worth \28 trillion is planned for the general account in the national budget for fiscal 2001. As in the previous year, public works spending is at the highest level ever, and social-security-related spending is steadily increasing, a reflection of the aging of the nation's population. As a result of the reconsideration of certain public works projects, moreover, the project with the largest increase in expenditure is construction of new Shinkansen ("bullet train") lines. The financial situation of all existing Shinkansen lines, except the Tokaido line, is quite strained. The newly planned lines, moreover, are to be built in far less populated areas, so prospect of their profitability and productivity is low. Public works related to the Ministry of Agriculture, Forestry and Fisheries will be undertaken on the same scale as in the previous year. Agriculture-related public works are especially questionable in terms of productivity. As long as a huge amount of public works expenditure continues to be appropriated for wasteful projects like these, fiscal structural reforms will remain hard to achieve.
 If stock prices remain at a low level and if the government activates financial measures to stimulate the economy in the name of boosting the stock prices, the fiscal situation will grow even worse. Of course, the cumulative public deficit does have the effect of sustaining the Japanese economy by means of public demand. But, as is clear from the experience of the 1990s, the effectiveness of bolstering the economy through public demand is limited. Rather than short-term policies for quantitatively shoring up the economy, those involved in the market want to see structural reforms and policies bold enough to enable the Japanese economy to recover in the medium and long run.
Fear of future fiscal collapse has closely linked to current economic performance and stock price levels
A distinct feature of the recent economic environment is that fear of future fiscal collapse has closely linked to current economic performance and stock price levels. The worst-possible scenario, in which the economy is stalled again by fiscal management measures, is bringing evidence of fiscal collapse out into the open. If recovery of fiscal health is delayed for the sake of immediate economic performance, adoption of future quantitative restraints could be rendered unrealistic.
 Even if the Japanese economy has the reserve strength to absorb heavier tax burdens, the consumption tax could never be raised to as much as 30 percent. Especially under weak government leadership, the maximum tax increase and expenditure reduction that the national economy as a whole can absorb cannot be achieved. The greater the necessary tax increase and the more drastic the reduction of public works and social security expenditures, the more difficult the task will be to achieve in one fell swoop.
 Once investors in national bonds on the bond market feel a sense of crisis regarding the future of the economy, these bonds will immediately become risky assets. If the values of the bonds crash, many financial institutions that hold large number of national bonds will suffer massive capital losses. This can trigger financial panic. The fear of fiscal management failure would make it quite possible that financial distrust would recur and the economy again fall into a stall.
 The urgent priority in fiscal management is to present a realistic scenario for reconstruction that will foster investors' trust in the market so that they will consider the future restoration of fiscal health feasible. If the economy is bound to be seriously sluggish for the time being, there is no need to drastically increase taxes or reduce government expenditures. It will be meaningful and beneficial, however, for the government to keep people clearly informed of the extent of quantitative restraints expected to be necessary in the future.
 If the current low level of stock prices is linked to apprehensions about the future of Japanese government finance, the government should not waste time in adopting necessary policies and institutional changes that will pave the way for fiscal and structural reforms. It should strive to increase people's confidence in future fiscal management by taking such measures as: adoption of a taxpayer numbering system so as to erase people's feeling of unfair tax burden; revision of the current project assessment system to reduce wasteful public works; streamlining of the local allocation tax system that has corrupted morals in local governments; and reform of the public pension plan, which relies on the working generations to support a rapidly increasing population of elderly, imposing an unfair burden on younger people.








日本財団図書館は、日本財団が運営しています。

  • 日本財団 THE NIPPON FOUNDATION