Project Paper - Session 1
"Fiscal Problems of Japan: Toward Prescribing a Solution" (Abstract of Discussion Paper 04-J-006)
Behind the escalation of Japan's fiscal problems in the 1990s surely lies the government's enormous fiscal expenditure. Another major factor, however, is the rigidity of Japan's fiscal system which was unable to adjust to the changing macroeconomic structure during the post-bubble period. Also, there is no denying that the progression of "political fragmentation" - starting with the end of the many decades of single-party rule by the Liberal Democratic Party, followed by a shift to a coalition regime - served as yet another factor that contributed to fiscal expansion. Therefore, as a means to reduce fiscal deficits, an issue of the utmost importance, it is crucial to (1) centralize budgetary decision-making authority in an independent organization and (2) set numerical targets for a period of two to three years. These measures should serve as the "two wheels" to drive the reform that is needed. On the other hand, reform measures that need to be undertaken, based on a mid- to long-term perspective, to improve the efficiency of the budget system include: (1) implementation of lump sum budgetary allocation and ex post evaluation of budget execution vis-a-vis each government ministry, (2) introduction of a multi-year budget system, and (3) redefinition of deficit-covering bonds and construction (capital investment financing) bonds. When compared with the existing system, however, there undeniably exists a trade-off between "discipline" and "flexibility." It is thus necessary to create an environment where such a trade-off can be improved by, specifically, increasing the transparency of the budget system. With regard to the tax system, the government must, first and foremost, consolidate and rationalize the numerous deductions and special breaks that come under the Special Taxation Measure Law - the presence of which has been the prime cause for the complexity of Japan's tax system - to expand the scope of personal income that is subject to taxation. Only then, the government could and should seek people's understanding regarding the need to raise the consumption tax rate by sincerely explaining the current state and future prospect of Japan's fiscal condition thereby restoring public confidence in and support for the government.