MyVision

No.13 2015.9

Expenditure
Reforms that inspire
Public Confidence

Japanʼs government has formulated a Basic Policy on Economic and Fiscal
Management and Reform, looking towards the realization of its target for fiscal
consolidation in fiscal 2020. For the government, seeking to realize economic
growth and fiscal reconstruction, the reform of expenditure, and in particular thereduction of social security expenditure, is of paramount importance. But how
will it be possible to achieve public consensus regarding uncomfortable reform
measures?

CONTENTS
Expert Opinions

What does Expenditure Reform Mean for theJapanese Public?
Present the choices and promote
public discussion
Yasushi Iwamoto

Professor, Graduate School of Economics,
The University of Tokyo

Government Finance should be
looked at from the perspective ofpeople and not solely from that ofMinistry of Finance
Koichi Hamada

Indicate the concrete consequences Tuntex Professor emeritus of Economics, Yale Universityof reductions for each item
We must learn from GermanyʼsRyuzo Miyaosocial security reforms
Professor, Graduate School of Economics,
Kenji Hirashima

The University of Tokyo

Allow public ﬁnance to function asa shared social foundation

Professor, Institute of Social Science,
The University of Tokyo

Naohiko Jinno

Emeritus Professor, The University of Tokyo

About this Issue

Noriyuki Yanagawa

Expert Opinions

What does Expenditure Reform Mean for
the Japanese Public?
What meaning does expenditure reform, taking in the reduction of social security expenditure, hold for
the Japanese public?
How should we approach the reduction of expenditure?
In this issue of, experts in the fields of financial policy, macroeconomic policy, and fiscal policy
offer their perspectives on these questions.
An expert in German politics also considers the success of Germanyʼs social security reforms.

Interviewer: Reiko Kanda, NIRA Executive Vice President
Editor: Kazuyoshi Harada
Period of interviews: April - May 2015

Present the choices and promote public
discussion
Yasushi Iwamoto
Professor, Graduate School of Economics, The University of Tokyo
There is an absolute imbalance between the amount of tax paid to thegovernment by the public and the cost of the provision of the services that thepublic receives from the government in Japan’s current government
budget. The government is therefore funding public services of a value
greater than the value assumed by the public. Given this, if the public is averse to tax
increases, the government must restrict its funding of public services to alevel that matches tax revenues.
How to control social security expenditure is the major issue in reducing public expenditure. Against the background of a deﬂationary
environment, income levels have declined significantly as a result of theLehman Brothers collapse and the Great East Japan Earthquake, but the cost of
medical and long-term care services and the level of pension benefits haveremained the same, and the ratio of social security expenses to income hastherefore increased dramatically. Fiscal expenditure also spiraled due toresponses to the Lehman Brothers collapse and the Great East Japan
Earthquake, and has not fully returned to the level projected by a normal budget. Expenditure is high, and I believe that there is adequate
margin for reduction.
At present, new private savings which would provide the government with funds
are drying up, and the limit for absorption of government bonds is also
being reached. It will not be possible to continue to rely on displacing theproblem onto future generations.
The choice is whether to increase taxes and maintain the level ofpublic services, if resistance to tax increases is strong, to lower thelevel of public services and reduce expenditure, or the combination of them. It willbe essential to offer the public these choices and stimulate public discussion. Another reason that imposing the problem on future generations is ofconcern is that it represents a political process that does not suffi-

ciently reflect the opinions of younger generations and future generations. It might
be possible in public discussion of the issue to give only the 20-something
generation the right of decision. Leaving the decision in the hands of thisgeneration, which will be long-lived and will support Japan’s future, would
certainly be one way of approaching the issue. ■Professor Iwamoto conducts research on policy issues related to social security and macro fiscal management. He is an authority in the areas of analysisof the social security system using frameworks derived from economics andempirical research using both micro and macroeconomic data.

Indicate the concrete consequences ofreductions for each item
Ryuzo Miyao
Professor, Graduate School of Economics, The University of Tokyo
There can be no argument that it is essential from a long-term perspective for Japan to reconstruct its public finances, but realizing steady growth isthe first priority. At a point when we are experiencing the effects of anincrease in consumption tax on the business conditions, we should not
implement forced, uniform reductions that lose sight of the economic
environment because of an excessive commitment to fiscal 2020 targets. The
concrete method of procedure to be adopted for the reduction of government expenditure, and the pace of reductions, are particularly important points. Unlike public works projects, in the case of a reduction insocial security expenditure, we can imagine a variety of routes by which thenational economy may be affected, depending on the details of the reductions. It will be important to continue in efforts towards the realization of the government’s targets for fiscal soundness following aquantitative analysis of the effect of reductions for each item of expenditure.
From the perspective of the redistribution of income, reductions which
diminish the functioning of the social safety net will have a negativeMy Vision No.13effect on growth. However, because it would promote an increase insaving for the period following retirement, the reduction of pension
benefits would have a positive effect on investment and growth in thelong-term.
On the supply side of the economy, raising the age at which thepension is paid would increase the incentive to work, and thus increase thelabor supply. In addition, if there is inefficiency or excessive supply in theareas of medical and nursing care, reforms would boost the efficiency and growthpotential of the economy. With regard to the effect of the reduction ofsocial security expenditure on the business conditions and the demand side ofthe economy, the magnitude of the negative effect on consumption woulddiffer depending on whether pension benefits or medical expenditure werereduced, or on the details of the potential reductions.
The government must therefore not stop with qualitative discussions, butrather push ahead with detailed quantitative analyses of the effects ofreductions on the redistribution of income and on the supply and demand sides of theeconomy. The government should compile concrete figures and present thepublic with a comprehensive picture of the effect of reductions in expenditure on the economy. This stance would also be effective in promoting the formation of a consensus among the public. ■Professor Miyao conducts theoretical and empirical research on Japan’s
monetary and macroeconomic policies. From 2010 to 2015, he was a member of the Policy Board of the Bank of Japan. Professor Miyao emphasizes thesupply side of the economy, and advocates aggressive monetary easing inorder to boost its functioning.

Allow public finance to function as a sharedsocial foundation
Naohiko Jinno
Emeritus Professor, The University of Tokyo
There is little likelihood of a country collapsing due to a fiscal deficit. The
important thing is whether or not public finances function effectively,
minimizing social and economic risk and unifying society. This is not the case inJapan.
The role that public finance should fulfill is to provide a shared social
foundation that provides the preconditions for the successful functioning of economic activity. Contemporary Japan is lagging behind in
putting in place two “nets” that will enable the nation to transition from a heavy
manufacturing industry-based economy to a knowledge-based economy; these are a net of social capital infrastructure, and a social safety net.
Because the nation does not possess these nets, which are oriented towards a new era, new industries are not being created, and public finance is not
fulfilling its role as a shared social foundation. Put another way, this means that we
do not possess a future vision of the society that we will become. Because of this, it
is difficult to convince the public that there is meaning in facing thediscomfort of fiscal reform.
In addition, in the case of Japan, there are problems in the budget
process. The nation has adopted the principle of perennial taxation, and there is no
discussion of revenue during the drafting of budgets. However, revenue andexpenditure must inherently be discussed in tandem. The fundamental
principle of public finance is to quantify expenditure and control income. The
necessary expenditure for the public services provided should be estimated, and a tax burden commensurate with this amount should beassented to by the public. The process of discussion towards this goal would also
foster an awareness of public finance among the public.
Today’s Japanese public is confused about what type of society it
wishes to build, and undecided concerning its stance regarding publicfinance. The nation’s taxation rate is low, but it is experienced as a heavyburden. The time is coming when we will have to provide services to all

without applying income restrictions, and call for mutual sharing of theburden in order to mount shared social projects. ■Professor Jinno serves as Chairman of the Local Public Finance Council. He
believes that the function of public finance is to integrate politics, economics
and society in order to enable citizens to actively improve their quality of life,
and is a critic of the truncation of public services.

Government Finance should be looked at fromthe perspective of people and not solely fromthat of Ministry of Finance
Koichi Hamada
Tuntex Professor emeritus of Economics, Yale University
The state of a nation’s public finance should not be judged solely from thestandpoint of the Ministry of Finance, but from the perspective of anation. It is often said that the Japan’s present generation is imposing afinancial burden on future generations.
However, the fact that the Japanese public holds the largest amount of net
foreign assets in the world indicates that there is hardly any nation sothoughtful regarding its descendants as Japan.
There is a problem concerning the fact that the Japanese government justmanages to keep the nation afloat by means of government bonds.
Because funds are allocated to servicing the interest on its mounting debt, thegovernment is unable to guarantee the necessary funds for public expenditure. And if a disaster occurs or another risk manifests, it will be
unable to provide the necessary financial response in a rapid fashion.
Increasing the taxation rate in order to fund interest payments will
impede the efficiency of the national economy. These are the negative
consequences of fiscal imbalance.
The reexamination of unnecessary expenditure should be a matter that isalways on the agenda. It is essential to constantly check government waste. The
provision of social security, i.e., the sharing of income with the poorest
strata of society, is a vital social policy. Today, however, we are seeing an
increase in waste in the form of the provision of benefits from wealthypeople to people who are not experiencing significant difficulty.
Leaving this type of waste unrectified makes it difficult to impose anincreased tax burden on the public. Increases in the taxation rate or
insurance premiums should be considered only after the efficiency ofexpenditure is addressed.
The Ministry of Finance is tireless in proclaiming Japan’s fiscal crisis both domestically and overseas, but to the market, that is, to investors, the nation’s public finances appear extremely sound. Because of this, theinterest on Japanese government bonds remains low by international
standards. ■Professor Hamada serves as a Special Advisor to the Abe Cabinet. He was a
key figure in the formulation of the government’s reflationary policy, and has
been a sharp critic of the Bank of Japan’s austere monetary policy before Haruhiko Kuroda became its head.

Learn from Germany’s social security reforms
Kenji Hirashima
Professor, Institute of Social Science, The University of Tokyo
Germany is a federal republic, and as such the nation’s systemic arrangements are disadvantageous for the rapid implementation of political reforms. In addition, the nation has been compelled to respond toissues which have lingered from its reunification a quarter of a century ago.

Nevertheless, by contrast with Japan, which prioritizes immediateproblems and has postponed the work of fiscal reconstruction, Germany remained aware of the necessity of addressing its fiscal status, and pushed
steadily ahead with reform of its federal system and its social securitysystem. In the context of reform of its federal system, aiming towards therealization of balanced federal finances from 2020, Germany essentially set about balancing its state finances and revised the Basic Law,
setting an upper limit on the ratio of the federal government fiscal
deficit to GDP. In the area of the medical insurance system, Germany looked toHolland and other nations as examples, and instituted reforms on anannual basis. Germany presents many points from which we can learn when
considering systemic reform in Japan.
After its reunification, reform stagnated in Germany from the mid-1990s, and thenation’s economic situation worsened until it was labeled “the sick man ofEurope.” Following successive reforms in the 2000s, however, Germany is today a European leader, and appears to have succeeded infiscal reconstruction.
Under the Hartz reforms, a series of labor market reforms instituted during thechancellorship of Gerhard Schroeder, advisory committees were es-tablished from the top down by the Chancellor (as opposed to the system of establishment of deliberating councils by government departments), and thereform proposals they suggested were implemented one by one. Even when theupper and lower houses of the parliament were controlled by different
partisan majority, a not-uncommon situation in Germany, proposals were able to be
formulated via compromise between the parties in the “Grand Coalition” and thesplitting of the opposing majority in the Bundesrat.
No matter how difficult, Japan must also seek to reconcile fiscal reconstruction with the creation of a sustainable social security system. ■Professor Hirashima presents a dynamic vision of political change in contemporary Germany based on detailed analyses of systemic reforms in responseto changes in factors such as European unification, globalization, a declining
birth rate and aging population, and deindustrialization.

This is a translation of a paper originally published in Japanese.
NIRA bears full responsibility for the translation presented here.
Translated by Michael Faul.

About this Issue

Expenditure Reforms that inspire Public Confidence

Reexamination of the structure of government expenditure, inparticular the determination of how to reduce social security expenditure, are vitally important issues that must be addressed on apriority basis for the sake of Japan’s future. As the nation’s birthrate declines and its population ages, and abundant taxation revenues can no longer be expected, the time is coming for a fundamental reconsideration of how we can order the structure of government expenditure in order to enable consolidation of Japan’s
public finances.
In its research report “Social Security Reform: The Only WayForward,” NIRA indicated that the implementation of aggressive
social security reforms and the reduction of government expenditure would be essential to the reconstruction of public finances inJapan. Following on from this, in this issue of My Vision, experts
in a range of disciplines discuss the issues facing Japan’s public finances.
At first glance, there appear to be numerous conﬂicting points
in the opinions expressed by the experts. What is common to all,however, is an emphasis on the importance of considering the details of government expenditure with a focus on the meaning ofreforms for the public. While their viewpoints may differ, all of
the experts clearly indicate the necessity of reexamining where
and to what extent government expenditure is allocated.
The question of how to approach the reduction of government

expenditure in the four-year period until fiscal 2020 will be concretely examined in Japan based on the effects of the Basic Policy
on Economic and Fiscal Management and Reform and the orientation of the budget for each fiscal year. Even if there is agreement
concerning the generalities in the discussion regarding the reduction of expenditure, objections will be raised to specific courses,
and it will be difficult to realize a consensus. However, there will
be no way forward if we attempt to avoid this process.
The time for cool discussion of how, and on the basis of which
conceptual framework, to approach the reduction of social security expenditure is coming. Each of the opinions presented in thisissue of My Vision offers a wealth of suggestions that can serve asa reference for consideration of these issues.
Social security expenditure is intimately bound up with thelives of the nation’s citizens, and it will be essential to focus that
expenditure as efficiently as possible in the areas in which it isgenuinely needed. It is time for us to go beyond superficial emotionally-charged arguments, and adopt a constructive stance indiscussing reform.
Noriyuki Yanagawa, NIRA Executive Vice President(Professor, Graduate School of Economics, The University of Tokyo)

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