RIETI Report January 12, 2024

Proposal for Establishment of an Independent Fiscal Institution and Importance of Ex-Post Review

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Welcome to RIETI Report.
This bi-weekly newsletter will keep you updated with the recent columns, event information and research results by RIETI fellows and other leading economists in Japan and around the world.

In this edition, we are featuring topics related to establishing an independent fiscal institution in Japan. Consulting Fellow Kazumasa Oguro claims the importance of establishing such an institution as reducing fiscal deficits is politically difficult, especially due to the common resource issue.

We hope you will enjoy it. If you have any feedback, we would love to hear from you (news-info@rieti.go.jp).
Editors of RIETI Report (Facebook: @en.RIETI / X (formerly Twitter): @RIETIenglish / URL: https://www.rieti.go.jp/en/)

This month's featured article

Proposal for Establishment of an Independent Fiscal Institution and Importance of Ex-Post Review

OGURO KazumasaConsulting Fellow, RIETI

In early October 2023, the Reiwa People's Council (popularly known as Reiwa Rincho), which was established by Yuzaburo Mogi, Kikkoman's honorary CEO and chairman of the board, and others, compiled and announced a proposal paper titled "Toward Realization of Fiscal Management for Creating a Better Future -- Establishment of a Long-Term Fiscal Projection Committee and a Policy Program Evaluation Committee." The proposed long-term fiscal projection committee is equivalent to an entity known in other countries as an independent fiscal institution (IFI). I also proposed the establishment of an IFI in one of my book, Restructuring of the Japanese Economy (written in Japanese, Nikkei Publishing Inc.), and other publications that came out more than 10 years ago.

Establishing an IFI is important because reducing fiscal deficits is politically rather difficult. Political factors that may generate fiscal deficit include (1) the political business cycle, (2) politicians' strategic motives, and (3) the common resource problem. Of the three, the common resource problem is considered to be the most potent factor.

Generally speaking, the common resource problem refers to the tendency of publicly shared resources to be overly used compared with privately owned resources. The "tragedy of the commons," which represents the worst case of the commons resource problem, has become quite well-known as a phenomenon of common resources being entirely depleted due to excessive use. In the case of fiscal management, fiscal transfer policy is by nature a zero-sum game, and therefore, if fiscal expenditure is increased, ultimately, someone (including future generations) will be made to bear the cost of fiscal expansion.

However, as individual agents' benefits and costs are not necessarily linked to each other in a clear-cut manner, cost awareness tends to be weak. As a result, the phenomenon of growing political demand for increasing fiscal expenditure resulting in fiscal deficits is becoming more common. This is exactly the fiscal equivalent of the tragedy of the commons.

To read the full text:

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