Keen Eyes for Economic Trends: What happens when the public loses trust in the Ministry of Finance?

SATO Motohiro
Faculty Fellow, RIETI

Several scandals have recently shaken the Ministry of Finance, including the falsification of official documents related to the sale of nationally owned land to the school operator Moritomo Gakuen and accusations of sexual harassment by the vice finance minister.

The Japanese government has set a new fiscal reconstruction target of achieving a primary balance surplus by FY2025. Some worry, however, that mistrust in the Ministry of Finance may negatively impact fiscal reconstruction efforts, including the further raising of the consumption tax rate. Loss of trust in the ministry could weaken public support for fiscal reconstruction.

Of course, the purpose of fiscal reconstruction is not to benefit the Ministry of Finance. Fiscal reconstruction is aimed at securing sustainable public finances and thereby alleviating concerns about social security and other safety nets so that Japanese citizens, including future generations, can live with a greater peace of mind.

Japan has long valued the credibility of organizations and individuals above all else. In fact, according to many respondents to Cabinet Office approval rating surveys, the factor that determines their support for the Cabinet Office is "trust in the character of the prime minister." We could say that what the government is trying to achieve (fiscal reconstruction) is less important than who is trying to achieve it (Ministry of Finance). While true, this is not to say that we should hand a blank check on policymaking to any politician or bureaucrat who seems trustworthy. To do so would lead to the rise of populists, and could even harm Japan's very system of democracy.

Trust in the Ministry of Finance may take time to recover, but what should be secured as quickly as possible is trust in what the government is trying to achieve—fiscal reconstruction. Needless to say, the government must lay out a clear roadmap to fiscal reconstruction and pursue annual expenditure reform in such areas as social security and local government finance as a form of "evidence-based policymaking," along with raising the consumption tax rate.

In addition, the government needs to produce nonpartisan forecasts (estimates) for public finances. Overly optimistic forecasts, such as ones predicting high growth rates and increased tax revenue, make it difficult to put the brakes on annual expenditures, resulting in little progress on fiscal reconstruction.

The Cabinet Office periodically releases "Economic and Fiscal Projections for Medium to Long Term Analysis." However, it is hard to deny that these projections, which the Cabinet Office produces itself, all too conveniently support its strategies for escaping deflation and achieving growth under Abenomics. Other estimates such as the Ministry of Finance's "Long-term Estimates of Japan's Financial System" seem more reliable, but tend to attract criticism that they are part of a conspiracy to raise the consumption tax rate.

The United Kingdom's Office for Budget Responsibility is an independent fiscal oversight body established in 2010 to eliminate such political bias. It releases a range of forecasts related to the economy and public finances, from future economic outlooks to the impact of economic policies and land taxes (and recently the impact of Brexit). The office's role, however, is strictly to provide analysis and not to evaluate policy. It was designed to offer a third-party perspective without direct involvement in policy making. The Bureau for Economic Policy Analysis in the Netherlands and the Congressional Budget Office of the United States have long histories as similarly independent fiscal oversight bodies.

This does not mean that their forecasts are always accurate. There are many uncertainties underlying economic trends. Even so, these agencies offer greater transparency because they disclose such information as their estimating methods and preconditions. In Japan, a country that places great emphasis on who is making policy, estimates from an independent, nonpartisan organization might be an effective way of building trust in fiscal reconstruction.

>> Original text in Japanese

* Translated by RIETI.

May 26, 2018 Weekly Toyo Keizai

June 7, 2018

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