Public Policy and Politics in Times of Population Decline

Part 6: Budget Management from a Medium- and Long-Term Perspective

OGURO Kazumasa
Consulting Fellow, RIETI

In a rapidly aging society, Japan needs to administrate public finance in which intergenerational equality and fiscal sustainability are achieved at the same time. However, under the current budgeting framework, the discussion tends to be focused more exclusively on the sustainability of public finances.

One cause of this is the fact that public finances are administered for "single years," an extremely narrow time perspective. Another factor is that the current fiscal administration does not take into consideration a "time difference" between the contributions paid by an individual to the government over his or her lifetime and the benefits obtained by the individual from the government.

While there is some range among generations, the amount of benefits, which are obtained from government spending on security and national defense as well as government investment for social capital formation such as dams, roads, and the burdens such as taxes, are at the same level. There seems to be a small difference between the times when an individual obtains benefits and when he or she pays out the contributions over his or her lifetime. On the other hand, in terms of social security such as pensions and medical and nursing care, there is a significant gap in time when an individual makes such contributions in the form of insurance premiums or others, and when the person receives such benefits.

Currently, the "social security budget," which entails a significant time gap, and "budgets for other expenditures," which have a small time gap, are managed collectively in single-year budgets. Consequently, we become distracted by the fiscal sustainability, in order to curb the ballooning social security budget, and become unable to focus on rectifying the intergenerational gaps.

To resolve this situation, we need to incorporate "generational accounting," which allows us to grasp the net burden borne on a generation-by-generation basis into the current budget formulation process. Moreover, we need to divide strictly between the social security budget and other budgets, and manage the social security budget, which is the core of the reform, on a medium and long-term basis instead of on a single-year basis.

Another tool is the use of a "macroeconomic budget framework" which sets the framework for expenditures over several years using generational accounting as a guide. For example, by referring generational accounting as well as prudent economic forecasts estimated by the Cabinet Office, an expenditure framework for the next three to five years is determined at the initiative of politicians. Based on this, we should set up a system where the National Diet monitors whether ministries are using their budgets efficiently.

>> Original text in Japanese

* Translated by RIETI.

November 3, 2015 Nihon Keizai Shimbun

January 27, 2016