Keen Eye for Economic Trends: Now is the time to rethink and forge consensus on fiscal consolidation

SATO Motohiro
Faculty Fellow, RIETI

What is certain to happen regardless of the results of the general election is the postponement of the fiscal consolidation goal of turning the primary budget deficits of the national and local governments into a surplus by FY2020. The players in the field have moved the goalpost for their own convenience.

This is sure to aggravate the fiscal balance regardless of whether the government decides to freeze the plan to hike the consumption tax rate or to go ahead with the plan and use the additional tax revenue to realize free education. Although the government has not abandoned its fiscal consolidation initiative, it will need to rethink how to implement it.

If we are to view this situation in a positive light, we should seize the moment to take a fresh look at the significance of fiscal consolidation. Until now, various people have been discussing fiscal consolidation with different goals in mind. Some people have called for reforming the social security system by combining a tax rate increase with revision of the healthcare system and medical fees, while others have focused on protecting their vested interests instead of implementing reform.

Reforming the social security system in a way that provides security for not only elderly people but also all generations of people as has been proposed by the Shinzo Abe administration may be viewed as a structural reform if the overly generous benefits for the elderly are rolled back. However, if the reform merely adds support for child-caring families to the existing benefits under the current system, it will only create a more bloated system. In the first place, the integrated reform of the social security and tax systems was intended not only to raise the consumption tax rate but also to improve the efficiency of the social security system through the prioritization of social security benefits. Realizing tuition-free higher education will become nothing more than a relief measure for universities if it ends up merely making up for a decline in tuition revenue through subsidies.

Meanwhile, if the government arranges the subsidy allocation in a way that encourages university consolidation and an improvement in the education level, the plan will lead to structural reform of university education. When implementing reform, it is essential to distinguish the end and the means. Raising the consumption tax rate or realizing free education is not an end in itself but a means.

In the past, each time it set about reform, Japan's priority appeared to have been forging a broad consensus on means, such as a consumption tax hike, while keeping the end amorphous. However, under this approach, support for reform does not last long due to the absence of consensus on the end.

Therefore, we should think once again and forge a consensus on the end that should be achieved through fiscal consolidation. The end is making it possible for the government to continue to exercise social security and other necessary functions into the future by ensuring fiscal sustainability. To do so, it is essential to secure financial resources and correct spending inefficiency at the same time. That is because if the budget increases while spending remains inefficient, sustainability will be put in doubt. As long as there is a consensus on the end, there will be room for the government to develop a fiscal consolidation plan which can obtain an agreement from people who insist that spending reform must be completed before the consumption tax rate hike.

Meanwhile, the government should keep distance from people who support the consumption tax rate hike as a way to protect their vested interests without addressing problems such as wasteful, inefficient spending. I believe that fiscal consolidation can be achieved with support across party lines. Whether Japan pursues a "big government" (welfare state) approach or a "medium welfare, medium burden" approach, the prerequisite is sound finance. As it is desirable to maintain the affordability and good quality of public services, wasteful spending that does not contribute to the welfare of the Japanese people should be eliminated. All of us Japanese are in the same boat: we are destined to live together in this country. Even though there may be differences of opinion over the vision of the future of Japan, our boat will sink unless we work together to plug the big hole (budget deficit) in its bottom.

Following the election, the pressure for increasing fiscal spending is set to grow. However, catering to the voters' needs is not all that policymakers should focus on. It is also important to discuss how the fiscal problem should be fixed so that this country can be handed down to future generations in a sustainable fiscal condition.

>> Original text in Japanese

* Translated by RIETI.

October 28, 2017 Weekly Toyo Keizai

December 12, 2017

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