Keen Eyes for Economic Trends: The fantasy that "we'll manage somehow"

SATO Motohiro
Faculty Fellow, RIETI

The Japanese government reached a Cabinet decision in June to adopt its Basic Policy on Economic and Fiscal Management and Reform 2018, which includes a new plan for the nation's fiscal consolidation. The policy's targets include achieving a primary balance (PB) surplus for the central and local governments combined by FY2025 and stably lowering the ratio of public debt to gross domestic product (GDP). It also sets FY2019-FY2021 as a period to reinforce the nation's fiscal base, primarily through social security reform.

It should be noted, however, that this policy postpones the target of a PB surplus by five years (FY2020 was the previous target) and does not set a concrete numerical target for growth in social security costs, stating instead that "the government will seek to control the year on year expenditure flexibly, not by allocating costs evenly every year." In many aspects, the policy reflects a setback in fiscal reconstruction.

In the first place, the policy's economic outlook is overly optimistic: in achieving a primary surplus, for example, it assumes 3% economic growth. Supposing for the moment that Japan were to press forward with more structural reforms (deregulation, work style reform, etc.) for the sake of 3% growth, this might indeed motivate the reform.

On the other hand, if we just assume a high rate of growth, this will reinforce the idea that "we will manage somehow" even without painful reforms. That situation will not lead to establishing "the basis for sustainable economic growth and fiscal sustainability" as called for in the Basic Policy. However, it is not just the economic outlook that has given us an optimistic "we will manage somehow"- way of thinking.

A hike in the consumption tax is postponed, but the national government has still "managed somehow" to deal with the child rearing as a part of social security repletion as promised in a joint reform of the taxation and social security systems. In another case, monetary easing by the Bank of Japan which purchases large amounts of Japanese government bonds to keep the interest rate close to zero has also made the government "manage somehow" with the national finance (interest payments, etc.). It cannot be denied that these have given false expectations to the people and the market that "we will manage somehow" even though the government has debts in excess of 1,000 trillion yen.

To look at an everyday example, even when updating and managing costs of water and sewer services increase and the balance slips into the red, many local governments would not raise rates; instead they take money from their general budgets to make up for the loss. Similarly, when the cost of medical care rises, the government would transfer money from the general budget, avoiding to raise national health insurance premiums. In both cases, governments have "managed somehow" without increasing the burden on citizens, despite our aging water and sewer infrastructure and rising medical costs. This gives citizens the false idea that "we–will manage somehow".

In this manner, both central and local governments have "managed somehow" not to trouble anyone with the problems of social security and other public services, regardless of the severe fiscal outlook. People point out the loss of trust in the government because of the Moritomo issue, among others, but Japanese officials, both at the central and local levels, may be very serious on the whole about doing their best for the people.

In January 2018 in the United States, the White House and U.S. Congress failed to agree on a federal budget, leading to the shutdown of some government institutions and tourist facilities including the Statue of Liberty. This was the natural outcome of failing to have a budget, but if it were in Japan, we would have "managed somehow." Still, this could continue to send a misguided message that "we will manage somehow."

If we think, "we will manage somehow," the pressure from politicians to increase annual expenditures is unlikely to subside. Moreover, Japanese citizens will not understand the state of national and local finances correctly, which would not lead them to having a shared sense of crisis nor influence them to taking any interest in these affairs as their personal business.

>> Original text in Japanese

* Translated by RIETI.

July 14, 2018 Weekly Toyo Keizai

August 31, 2018