RIETI Symposium

Fiscal Reform of Japan: Redesigning the Frame of the State


Session 1: Introduction
"Fiscal Problems of Japan: Toward Prescribing a Solution"
TSURU Kotaro (RIETI Senior Fellow)
HONMA Masaaki (Professor, Graduate School of Economics, Osaka University)

In the first session, President Aoki made some opening remarks to explain how he viewed the overall issue of fiscal reform. He stated that now Japan's fiscal situation was facing a crisis and the fiscal system was showing signs of unconformity, there was a need to change not just the fiscal structure but also the "frame of the state," including its political system, so as to regain long-term sustainability. He continued by saying the "bureau-pluralism" that had long served to balance various interests in Japan was malfunctioning, exacerbating the so-called "common pool problem," where politicians and government ministries allowed vested interests to receive budget allocations without shouldering an appropriate burden, and thus leading to fiscal crisis. He pointed out that given the complementary relationship between various systems, it was necessary to reform the fiscal system and the nation's decision-making systems simultaneously through strong leadership. He also explained that the presentations that would be made at this symposium by the researchers collectively served as the fiscal reform project's interim report, and that, following exhaustive debate at the symposium, he would like to present the final report in published form.

Following this, Senior Fellow Kotaro Tsuru's report entitled "Fiscal Problems of Japan: Toward Prescribing a Solution" gave a bird's-eye view of the entire project. He explained how systems and institutions were a necessary consideration when addressing fiscal problems, and that the present fiscal crisis in Japan was triggered by the rigidity of the budget-compilation process, whereby outlays could not respond flexibly to changes in the economic environment or changes in the political environment. As specific suggestions for the direction that fiscal reforms might take, Tsuru cited the centralization of the decision-making authority in the budget process, the setting of numerical targets, lump-sum budget allocation by ministry and ex post facto evaluation, the introduction of a multi-year budget system and a review of the classification of deficit-covering bonds and construction bonds. He also said that budget transparency was an important prerequisite for such reforms, and called for the need for a more neutral tax system and expansion of the taxable base.

Masaaki Honma, professor at Osaka University's Graduate School of Economics and a member of the government's Council on Economic and Fiscal Policy, then commented on these reports. He said his understanding of the current problems as seen through his activities with the Council on Economic and Fiscal Policy were the same as those of this project. When considering solutions to the current fiscal problem, what was especially important was the boosting of potential growth and productivity, and that was why the government was pushing forward with supply-side reforms to "allow the private sector to do the things that it can." He said the problem now was how to bring back the flow of funds that had shifted from the private to the public sector during the 1990s. At the same time, the Council on Economic and Fiscal Policy was also bearing the role of information disclosure, and while it was contributing to improving transparency, issues still remained such as the difficulty of understanding the relationship between fiscal statistics and System of National Accounts (SNA) statistics. He added that he hoped the discussions at this symposium would support the direction that the Council on Economic and Fiscal Policy was taking.

President Aoki responded by saying he believed professor Honma shared an understanding of the basic direction that fiscal reforms should take. He also acknowledged that the issue of productivity was indeed important when long-term sustainability was taken into consideration, and discussions that simply fiddle with figures were meaningless. At the same time, he noted that amid the malfunctioning of "bureau-pluralism," it would become necessary to discuss how to create a top-down decision-making structure and establish vertical and horizontal compartments. Meanwhile, Senior Fellow Tsuru agreed that evaluation of fiscal policies based on SNA statistics and the boosting of potential growth were indeed important.

(Text compiled and edited by KIMURA Yuji, RIETI Research Staff)