By Hidekazu Tanaka and Noriko Sakakibara / Yomiuri Research Institute Senior Research FellowsThe Japanese government has passed a spending package on the scale of ¥2 trillion to provide for free education and other programs, following the promise made by Prime Minister Shinzo Abe during the House of Representatives election. Funding will come from the planned consumption tax hike to 10 percent, now partially redirected to this new target.
While measures to address the declining birthrate are important, this move will delay fiscal restructuring and endanger the stability of a social security system overly reliant on tax revenue. There is an urgent need for integrated restructuring of social security and tax schemes (see below).
Worst among developed countries
In October 2019, the current consumption tax rate of 8 percent will rise to 10 percent. Of the more than ¥5 trillion in new revenue, some ¥2 trillion is to be allocated to free education for children and university students.
The revenue from the tax increase, however, was previously promised for stabilizing funding for the ever-increasing costs of health care and nursing care.
Redirecting the funds will create a shortfall in these areas and leave public finances worse off. The new policy direction has delayed the fiscal 2020 objective of achieving a primary balance in government spending — which is to cover policy expenses through tax revenue, without relying on the issuance of bonds — or debts.
The outstanding debt obligations of the central government and local governments exceed ¥1 quadrillion, a level that is approximately twice Japan’s gross domestic product and the worst among developed nations. This is due to increased social security spending accompanying the aging society and the declining birthrate.
The social security system, which encompasses pensions, health care and nursing care, is part of the social insurance scheme funded by insurance premiums from workers and companies.
However, the lagging economy and other factors have impeded the growth of insurance premium revenue, leading to a heavy reliance on tax income.
For example, one-half of the funding for the basic pension is borne by the national treasury. If government financial policies stall, there will not be sufficient funding to avoid substantial cuts to pensions, health and nursing care subsidies, which will deal a severe blow to the public’s living standards. Fiscal reform is essential to forestall such a predicament.
‘Fiscal child abuse’
The central and local governments’ social welfare expenses has reached approximately ¥40 trillion in the fiscal 2017 budget.
Of that amount, approximately ¥19 trillion is covered by consumption tax revenue, while the remaining balance of some ¥21 trillion will come from things like issuing government bonds, which pass the bill on to future generations. This shortfall is the equivalent of an 8 percent consumption tax rate, meaning that a 16 percent consumption tax rate — the current 8 percent plus a hike of 8 percent — is needed if the difference is to be covered.
Stated differently, people are receiving social security subsidies equivalent to a 16 percent consumption tax rate, while incurring a tax bill of only 8 percent.
This is the same as buying social security services worth ¥20,000 every day but only paying ¥10,000 and leaving the balance to be shouldered by later generations.
If we continue this practice, none among us should feel secure about the future lifestyle of our children and grandchildren. Imposing the burden of our social welfare costs on future generations has been called “fiscal child abuse,” and Japan is the greatest offender.
In 2025, the entire baby boomer population will be 75 years old or older, an age bracket called “advanced elderly.” The expected increase in the number of people needing health care and nursing care will cause a rapid spike in social welfare costs.
To cover these social welfare costs through consumption tax revenue, a higher rate in the order of 20 percent, as seen in many European countries, would be needed. There is also a simultaneous need to keep down expenses for health care and nursing care.
The government committee handling reform of the social welfare system has addressed these long-term challenges, but progress has stalled, as the consumption tax hike has been postponed twice. Discussions need to be hastily resumed.
Make benefits clear
Despite the dire circumstances surrounding public fiscal policies, the opposition parties in the lower house all supported freezing or halting consumption tax increases, showing deep-seated resistance to such measures among both political parties and the public.
Although enhancements to the nursing care system and national pension fund were included when the consumption tax was initially introduced and again when the hike was proposed, these measures are not known to the general public. That is presumably because they cannot feel the benefits.
It will be easier to garner support for greater fiscal burdens if more people can directly experience the results, such as enjoying child-rearing benefits by having the revenue used for free education and the like. Creative approaches are needed to boost the effects of the spending package.
Improving education quality
The spending package has promised to boldly direct revenue to children and child-rearing families in order to significantly strengthen measures to address the declining birthrate.
Just 1.31 percent of Japan’s GDP in fiscal 2015 was allotted to budgets supporting child-rearing, only one-third to one-half of what is spent in France, Sweden and Britain, which have been able to improve their birthrates. Central and local government spending on education in Japan is also small, which shifts the burden to households and has been identified as one factor behind the low birthrate. Therefore, there is reason to praise the objective of lowering this burden through free education.
However, there is also concern that free preschool education and childcare for 3- to 5-year-olds — a major promise of the package — will have a negative impact on the problem of too many children being stuck on waiting lists.
As of last spring, the number of children wait-listed at licensed day care centers reached 26,000, with the problem at its worst in urban areas.
The new government policy will bring forward the construction of new facilities, creating capacity for 320,000 more children by fiscal 2020. However, if subsidies increase in tandem, further demand will arise and there is a risk the capacity will not be sufficient.
A parents’ group called Kibo Suru Minna ga Hoikuen ni Haireru Shakai o Mezasu-kai (Striving for a society where all applicants can enter preschool) has collected over 30,000 signatures to petition the Liberal Democratic Party and others to consider speeding up measures to improve the pay of childcare workers, and adding to the funds for expanding day care centers, if the revenue earmarked for free education is indeed available.
Ensuring the quality of early childhood education is also a substantial challenge.
In Britain, the Department for Education has set learning achievement standards and has an organization specializing in educational assessment to carry out audits and offer guidance at day care centers and similar facilities. Quality preschool education of this kind is available for free 15 hours per week. In France, public preschools offer a curriculum of free classes to all 3- to 5-year-olds largely in conformity with rules for compulsory education.
Japan, which has no such system, lacks both a consistent curriculum and quality standards for early childhood education. As a result, the proposed free preschool policy targets all time spent at day care centers.
Michiko Mukuno, a visiting researcher at Oita University who has studied preschool education and day care in major countries, said: “Developed countries’ attention to early childhood education comes within the context of empirical research that has shown the significance of investment in this area. For example, high quality education and childcare produce higher future incomes. Rather than just free education, what needs to be considered are policies to ensure the quality of education and ways to enhance the effects of invested revenue.”
■ Restructuring social security, tax schemes
Reforms seek to leverage a consumption tax hike, both to enhance social security and bolster the country’s fiscal standing. In August 2012, a three-party agreement involving the then Democratic Party of Japan, the Liberal Democratic Party and Komeito approved comprehensive reform of social security and tax legislation to raise the consumption tax to 10 percent. The procurement of further revenues will be needed to cover expanding social security costs.