RIETI Symposium

Fiscal Reform of Japan: Redesigning the Frame of the State


Session 7: Long-Term Perspective of Government Finance from Public Accounting Point of View
"Simulation Analysis of Fiscal Crisis"
KAINOU Kazunari (RIETI Fellow)
"Stock Analysis of Fiscal Problems: Focusing on Burdens Brought to Future Generations"
TAKAHASHI Yoichi (RIETI Consulting Fellow / Director of Financial Division, Kanto Local Finance Bureau, MOF)
KITAMURA Yukinobu (Professor, Institute of Economic Research, Hitotsubashi University)
KAWAMOTO Yuko (Senior Expert, McKinsey & Company, Inc)

In the seventh session, Fellow Kazunari Kainou presented his report, "Simulation Analysis of Fiscal Crisis." Using numerical simulations, he discussed the sort of problems that would occur should the Japanese government's management of fiscal policy remain unchanged, and what sort of policy direction was important for realizing sustainable fiscal management. The result was that "natural fiscal reconstruction through economic recovery" would not be possible. In order to realize sustainable fiscal management, some specific prescriptions were presented, such as raising consumption tax and abandoning economic stimulation through public works projects.

Consulting Fellow Yoichi Takahashi then presented his report, "Stock Analysis of Fiscal Problems: Focusing on Burdens Brought to Future Generations." He began by saying a nation's finances were the numerical representation of its policies and showed a framework under which long-term analysis of fiscal problems could be conducted using balance sheets. This was specifically applied to the public pension issue and the issue of privatization of four public highway corporations. After clearly defining the sustainability of the public pension system and the taxpayer burden of privatizing the highway corporations, he produced different calculations from those presented by the government. As a result, he pointed out that there would be some measure of improvement in the sustainability of the public pension program through the reforms that were currently proposed by the government, but added that the Social Insurance Agency and tax authorities should be integrated. As for the public highway corporations, their assets exceeded their liabilities, and it was possible for the four entities to be privatized without any burden being placed on the taxpayer.

In response to these presentations, comments were made by Professor Kitamura and Yuko Kawamoto, senior expert at McKinsey & Co., Inc. Professor Kitamura said that while the use of numbers to discuss fiscal reform in this session was acceptable for figures that have been widely discussed, there was the danger of figures getting ahead of the argument on issues such as public accounting where only a few publicized statistics were currently available. He commented that to avoid a situation where only the numerical results of studies were used, it was necessary to further clarify the premises for employing them. Having said that, he noted that while those models generally considered by economic scholars included the maximization of economic constituents, Kainou's did not. As an example, he asked what determined the government's behavior when the rate of economic growth was given. He also said the model was not closed on issues relating to the financial sector, and that he felt it was incongruous for it to deal with local governments as one entity. He also suggested that the bootstrap method be used in dealing with data limitations. As for the Takahashi report, Kitamura pointed out that although it said the current situation surrounding pension management was less than desirable, the situation would not be improved even if it were placed in the hands of the private sector, and he added that there would be no need to manage pension funds under the notional defined contribution system that had been adopted by Sweden. Also, as conditions for integrating the Social Insurance Agency and tax authorities, a unified identification number system would have to be introduced. Because the issue of government finances could be affected by the unexpected events and as such, room for renegotiation and discretion would have to be left - but this would have to be very transparent.

On the Kainou report, Ms. Kawamoto said that, up to now, bureaucrats had not been held to account on issues related to the nation's finances and the Fiscal Investment and Loan Program, and in that respect, what the Kainou report aimed to do was epoch-making. While there may be room for improvement in the model he used, she said she thought it was a novel idea to create a model that took into consideration the internal elements of the nation's fiscal structure. Having said that, she observed that the model did not take special corporations and the Fiscal Investment and Loan Program into account, and said these areas were important as they were likely to push up future burdens. In addition, she expressed concern that Kainou said the public should brace itself for a consumption tax of 20%, saying that this in itself could dampen economic growth. As for the Takahashi report, she commented that the aim of the analysis was not clear, and that while the aims of public accounting and policy evaluation were not as clear as those for corporate accounting, which is to maximize shareholder benefit, there was little meaning in conducting a detailed analysis without clarifying its aim. For example, even if nonperforming loans were to be recognized from the perspective of accounting, it would be meaningless if they were not recognized as a problem, and that what was important was how to use the accounting information. She also said that many judgments seemed to have been made without objective grounds.

Fellow Kainou agreed with Professor Kitamura that his model did not take maximization into account, and said that he hoped to improve the model in future. As for the comments made by Ms. Kawamoto, he said that the issue was how to view assets, and that because his model only took financial assets into account, the major issue in future would be how to deal with actual assets. As for the relationship between a consumption tax hike and economic growth, his response was that he had begun his research with matters that could be analyzed at that time. Consulting Fellow Takahashi said that while he did not deny that bureaucrats had not fulfilled their responsibility of being accountable, the "nonperforming loans" of public entities had been taken into account as "policy costs" and had been taken into consideration for drawing up policies. He added that due to time constraints he had been unable to present his grounds for two matters concerning public pensions, and that he would like to show the basis for his findings on other matters as well in the future.

In the discussions that followed, Professor Iwamoto commented that it was insufficient to have only the perspective of breaking even, as in the case of private companies, and have taxpayers shoulder any gap between the cost and actual benefit. In connection with the Takahashi report, Professor Konishi suggested that the idea of a going concern in terms of public corporations should be judged based on a comparative consideration between what can be offset through a reduction of government funding and its accumulated deficit; and that should be the difference between such corporations and private firms. Consulting Fellow Takahashi said the stock analysis of his report was the primary approach pointed out by Professor Iwamoto, and that based on current data, this in itself was useful for policy objectives, but added that the issue of cost advantage had been analyzed in another paper. Ms. Kawamoto noted that while it was natural for private firms and public entities to differ, ongoing deliberations were based on the presumption that the latter would be privatized.

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