RIETI Symposium

Fiscal Reform of Japan: Redesigning the Frame of the State

Session 8: Wrap-up Discussion

The eighth session was a discussion involving all of the symposium participants.

President Aoki said that RIETI had placed priority on individual research rather than making policy suggestions as a research institute as a whole, and that this was in an effort to keep the discussions sharp as a research body that was receiving a lump-sum subsidy from the Ministry of Economy, Trade and Industry. He added that he wished for the results of this project to be made widely known to the general public, and that while policy proposals founded on the research results of project members had been presented in the form of a press release [PDF: 122KB] by the project leaders, he wanted to see more discussions based on this. After an explanation of the policy proposals to wrap up the debate, he called for discussions focusing on the organizational positioning of the budget formulation process, how to proceed with local government fiscal reform, and fiscal management through market discipline.

Professor Morinobu explained how consumption tax was introduced and revised, and maintained that tax system reforms in Japan had not been implemented solely by the so-called inner league of the ruling Liberal Democratic Party's Research Commission on the Tax System and the Ministry of Finance's Tax Bureau. The history of tax reforms was one of finding middle ground between the policies of the ruling and opposition parties, he said. He also said that one reason why the Council on Economic and Fiscal Policy lacked power was because it had not, or did not need to negotiate with the ruling and opposition parties. Ultimately, deliberations in the Diet would become the most transparent, and it was important to establish a framework to enable debate to be conducted there. In response, President Aoki commented that when the budget formulation process was separated into four stages - creating an overall framework, deciding on the order of priority, compiling the specific budget and implementing it - a major issue such as consumption tax would probably fall into the overall framework stage. He then suggested that he wished to see debate on what sort of organizations should handle each of these stages.

Consulting Fellow Iio said it was impossible to ignore political factors when considering the overall framework, and said that even when securing a nonpartisan agreement in the Diet, the matter could be decided to a certain extent by the electorate. As for organizational positioning, he said Japan at present was trying to put together decision-making functions in a framework that was not suited for it, and that existing administrative organizations were not working well because the functions expected of them did not match the realities. Consulting Fellow Shuhei Kishimoto said that the state budget was a political issue, and that political leadership was needed to reform it. He added that it was not the aim of the Ministry of Finance to distribute resources, and it did not have such a role. As such, he suggested that some other organization, such as the Cabinet Office or the Cabinet Secretariat, assume the role of distributing the budget through political leadership. However, he also said that because taking the function of budget distribution away from the Ministry of Finance would probably be met with resistance, sections related to policy planning for the domestic finance industry, which controls fund flows, should be returned to the ministry as a substitute.

President Aoki asked Consulting Fellow Tanaka whether the role of prioritizing policies and setting up an overall budget framework and the role of distributing funds among individual government ministries and agencies should be assigned to separate organizations, and also enquired how other countries dealt with such rules and models. Consulting Fellow Tanaka replied that the finance ministries of other countries handle macroeconomic issues, and that these functions were grouped together, but Japan's case was unfortunate in that economic planning was placed under the Cabinet Office's control, financial planning was handled by the Financial Services Agency and the budget fell under the auspices of the Ministry of Finance. At the same time, commenting on the policy proposals, he said that talk of decentralizing the execution and distribution of individual budget items to individual ministries and agencies usually referred to discretionary expenditures, and that there was a need to strictly screen obligatory expenditures.

President Aoki later asked Professor Konishi to comment on the issue of fiscal autonomy for local governments and how reforms might lead to the establishment of their self-responsibility. Professor Konishi observed that the basis for such arguments was the general distrust of bureaucrats, and that the argument that decentralization was needed because of a lack of governance in the central government was wrong. He said that fiscal matters were basically a power structure, and he felt that the issue could not be fully discussed from the viewpoint of functionality alone. Having said that, he noted that, for example as in the case of compulsory education, if local governments were to shoulder the responsibility of implementation after the central government has decided on an overall policy framework, the current system would not be all that bad. If local finances were to be reformed so that they could be covered by local taxes alone, the central government would first have to clarify that the local governments had no responsibility for those operations. He summed up by saying in the end, the reform of local finances would mean changing the local finance plans from their current state, but there had not been much discussion on that issue, and he pointed out that the debate at the symposium was probably the beginning of such discussions. On the issue of local finances, Consulting Fellow Doi said it was meaningless to discuss the matter of revenue sources without clarifying how the roles of the central and local governments should be divided. He agreed with Professor Konishi's observation that the central government should guarantee the funds needed for compulsory education, and said that the national minimum should be the benchmark to use when dividing the roles of the central and local governments. At the same time, he said the reason he placed emphasis on revenue in his report was due to his perspective that the problem lies in the fact that the budgets of local governments had a softening effect on the budget constraints of the nation as a whole, and he added that he believed the local finance plans were bringing about a softening of the budgetary restraints of the nation as a whole. Consulting Fellow Kitami said that as for the roles of the central and local governments, the division of the roles of the two were decided in various ways - while in some instances they were stipulated by law as legally entrusted work, in others they were decided through the setting of the basic demand amount for the local allocation tax, and in some cases the work of the central government was decided by extending subsidies, while in others the work was done by the regional offices of ministries and agencies. He said that the issue of dividing the roles of the central and local governments could be discussed after first unifying them under the Ministry of Public Management, Home Affairs, Posts and Telecommunications.

Then, President Aoki urged the participants to discuss the issue of fiscal management through the discipline of the government bond market. Professor Kitamura said it was a bit strange for the central government to shoulder the role of market discipline through the issuing of bonds. Assistant Professor Kunieda mentioned the story of Federal Reserve Board Chairman Alan Greenspan, who during the administration of President Bill Clinton implemented monetary-easing policies while saying that fiscal reconsolidation was important and as a result succeeded in fiscal reconstruction by ensuring a soft landing for the economy from the pressures of fiscal reconsolidation. He said that such a scenario might be more desirable for Japan. Senior Fellow Tsuru said that the Watanabe report presented the neo-classical world view that the market is perfect, but the issue of whether government bonds could be fully absorbed by the market had tended to be overlooked by economists, and suggested that this might also have been linked to the issues of systems and political processes. He also noted that on the issue of monetary policy, the Watanabe report used on the one hand a clear index - the fiscal deficit - and on the other hand, natural interest rates, an index that is difficult to monitor. He asked how the central bank could guide short-term interest rates in such an environment. Senior Fellow Yokoyama said that if a market were to be established just within Japan, as in the case of government bonds, market discipline might not work. Ms. Kawamoto said she questioned whether the general public was aware of the role of market discipline in fiscal reconsolidation. She suggested that Japan's existing systems, for example the tacit guarantee of local government bonds, on the contrary were working to weaken market discipline. As for bureaucrats, she said they should only design systems after seriously evaluating the limits of their abilities. Professor Kitamura said that since the functions of markets were declining because funds had been shifted from the private to the public sector and banks had also kept money from flowing to markets by purchasing government bonds, the important thing was how to restore those functions. Having said that, he said that the zero-interest rate policy adopted by the Bank of Japan could lead to a loss of market discipline if continued for a protracted length of time, and that balance was needed on this point. Consulting Fellow Doi said he believed that fiscal discipline through interest rates might not work unless the zero-interest rate policy were scrapped and price adjustment functions made to work, noting that price adjustments were not working under the zero-interest policy and monetary policy had become dependent on volume adjustment, and that the existence of operations such as buying operations were making it difficult for fiscal discipline to be exerted through interest rates.

In closing, President Aoki thanked the participants for their valuable opinions and said their views would be utilized in future research.

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