RIETI Symposium

Fiscal Reform of Japan: Redesigning the Frame of the State

Project Paper - Session 7

"Simulation Analysis of Fiscal Crisis" (Abstract of Discussion Paper 04-J-018)

KAINOU Kazunari (RIETI Fellow)

Should the Japanese government's behavior with regard to fiscal management remain unchanged from that in the 1990s, what problems would the country face? And what policy changes need to be implemented to realize sustainable fiscal management? To find answers to these questions, an econometric model has been established to conduct numerical simulations. The actual results of the government's revenue, expenditures, outstanding balance of public debts, and reserve funds were first sorted out by institution � the central government, prefectural governments, municipal governments, and public pension programs. Assumed values concerning the macroeconomy, such as a real economic growth rate, were then used to analyze the structure of each of these institutions.

As a result, it was found that Japan's fiscal reconstruction cannot occur "naturally through economic recovery." More specifically, should Japan fail to correct its fiscal behavior, as developed in the 1990s, the primary balance would not improve even if high economic growth was maintained, and a recursive increase in the amount of outstanding government bonds would induce serious crowding-out effects. Furthermore, results of the analysis show that a decrease in economic growth would lead to further deterioration in the primary balance of the central and prefectural governments, while at the same time brining the nation's public pension program to a dead end.

Results show that in order to ensure sustainable fiscal management, the central government must implement revenue-restoration measures, such as raising the consumption tax rate, and relinquish policy that seeks to stimulate the economy by means of public works projects. The prefectural and municipal governments, for their part, are urged to take steps to reduce expenditures in return for the transfer of financial resources from the central government. With regard to the public pension program, results of the analysis point to the need to further curb the amount of pension benefits, rationalize the relevant administrative procedures, and make adequate changes to the pension system by, for instance, shifting the program governing the portion of basic pension from the current premium system to one funded by tax revenue. It was noted that the central, prefectural and municipal governments must act promptly to implement effective fiscal reconstruction measures.

Original discussion papers in Japanese [PDF:71.5MB] >>