Keen Eyes for Economic Trends: Why the Special Account for Post-COVID-19 Crisis Reconstruction should be Made

SATO Motohiro
Faculty Fellow, RIETI

To address the unprecedented crisis caused by the COVID-19 pandemic, the government of Japan formulated the first and second supplementary budgets totaling 57 trillion yen. The budgets include funds for a 100,000 yen payment to all residents of Japan, the Subsidies for Sustaining Businesses, and the implementation of tourism promotion measures (Go To Campaign), etc.

Funds for those supplementary budgets were raised through the issuance of government bonds, due to which state expenditures have already increased to 160 trillion yen, with the primary balance recording a deficit of 92 trillion yen. Drastic fiscal measures are strongly required from the perspective of facilitating rapid economic recovery, but only the size of the economic package has been prioritized and fiscal discipline seems to have eroded.

In reality, the transparency and validity of the consignment fees for the Subsidies for Sustaining Businesses (4.2 trillion yen) and the Go To Campaign (1.7 trillion yen) are now being questioned. In the second supplementary budget, 10 trillion yen is included as contingency funds. This may be partially used for countermeasures against the second wave of COVID-19 infections, but the legislature's verification procedures are not functioning sufficiently in this case and this does not conform to the principles of financial democracy.

Furthermore, the practice of needing to spend contingency funds in full leads to wasteful spending. Fundamentally speaking, fiscal expansion should not be accompanied with a loss of fiscal discipline. In addition to the appropriateness of the size of payments, the effect of the spending, such as whether employment is actually maintained as a result of providing the Subsidies for Sustaining Businesses, for example, needs to be verified. Thus, any non-essential spending in association with the COVID-19 crisis even in the 2020 initial budget should be postponed or reduced.

The tendency to prioritize the size of the economic package may originate from a Keynesian trust in the value of public works, in which digging holes only in order to fill them up again is seen as a source of value. People with such beliefs advocate that a project that seems wasteful at a glance may create jobs and income, spurring demand. As long as money continues to flow into the economy, it does not matter whether you provide 100,000 yen uniformly or pay expensive consignment fees. However, such view lacks a future-oriented perspective.

European countries have taken fiscal measures intensively focusing on fields relating to future digitalization and the greening of the economy. Their fiscal measures have aimed to eventually enhance growth potential and lead to measures against global warming, and are not limited to measures for stimulating demand at present.

In contrast, the Japanese government's fiscal policy seems to be short-sighted. Japan continues to lag behind in digitalization and the current COVID-19 crises has also revealed some other problems. Nevertheless, the digitalization-related budget only accounts for 1% of the supplementary budgets. Wise, forward-looking spending is urgently required.

Whether the entire fiscal size is under control is also under question. If the government cannot decrease spending that it once increased, no brakes can be applied to the expansion of expenditures and national finances are highly likely to worsen further. The upper limit for each ministry's budget request for FY2021 was eliminated. If the national finances fail to restore soundness even after the pandemic ends, maintaining social security and other social systems will become difficult.

One option is to separate expenses for measures against COVID-19 from the general account so that fiscal expansion would not continue after the pandemic ends. Similarly to the Special Account for Reconstruction from the Great East Japan Earthquake, expenses for measures against COVID-19 should be managed within the special account while enhancing the transparency of each program. Fund sources for redeeming government bonds should be specified in advance and terms of programs should be limited. The government maintains that it is not the time to consider fiscal reconstruction, but such a time will surely come in the end and the government needs to reconsider methods of achieving the goal of restoring fiscal health, looking ahead to the post-COVID-19 era.

>> Original text in Japanese

* Translated by RIETI.

August 22, 2020 Weekly Toyo Keizai

December 1, 2020