The Yomiuri ShimbunThe House of Representatives election last autumn was won overwhelmingly by the ruling parties, which publicly pledged to increase the rate of the consumption tax — a stable source of funds for social security spending and fiscal health — to 10 percent in October 2019. However, there is a strong view that 10 percent will not be enough as Japan’s population continues to age. In the draft budget for fiscal 2018, one-third of all revenue depends on government bonds. Kenji Yumoto, vice chairman of the Japan Research Institute, spoke about the future of the nation’s finances in an interview with The Yomiuri Shimbun.
The Yomiuri Shimbun: The government plans to allot ¥1.7 trillion of its increased revenue to realizing free education and day care. Funds to pay the national debt will therefore be insufficient, leading the government to give up its fiscal soundness target of achieving a primary balance (see below) surplus in fiscal 2020. What do you make of this?
Yumoto: First, it’s good that the consumption tax increase has become almost certain, as the administration of [Prime Minister Shinzo] Abe has twice put off raising it. But the delays regarding the fiscal health goal have seriously affected the national finances.
The goal was set for fiscal 2020 because the baby boomer generation will be 75 and older in 2022-24, and medical and nursing care expenses are expected to grow more quickly than they are now. As spending increases may adversely affect fiscal health, it was necessary to achieve a primary balance surplus in advance. If we stand by and do nothing, the primary balance will inevitably erode even further.
Govt debt snowballing
Q: The debt of the central and local governments has risen to ¥1.1 quadrillion. That’s an enormous sum that’s difficult to wrap one’s head around.
A: The budget deficit Japan has accumulated stands at 239 percent of its gross domestic product, exceeding Greece, which plunged into financial crisis, and markedly high among advanced nations. The deficit needs to be slashed as quickly as possible. Moreover, spending on social security benefits will rise from ¥120 trillion in fiscal 2017 to ¥149 trillion in fiscal 2025 as Japan ages faster than other countries. The debt will snowball unless a stable source of funds is secured.
Q: How can the debt be reduced?
A: There is a view that high economic growth will result in increasing tax revenue and cutting the debt. The Cabinet Office has estimated the primary balance based on a theoretically unachievable premise of a high growth rate that was more than double the nominal growth rate for the last several years. Even this estimate showed that realizing a primary balance surplus in fiscal 2020 will be difficult.
Q: What can be done about the increase in spending on social security benefits?
A: The only thing to do is raise the consumption tax. An increase of 5.7 percentage points is needed to cover the ¥14.2 trillion increase [for spending on social security benefits] that is supposed to be funded with tax money. The social security system will be unsustainable unless the consumption tax is raised to about 20 percent from fiscal 2025 onward.
Q: What’s predicted to happen if the consumption tax is not raised above 10 percent?
A: The budget deficit will worsen accordingly. If fears spread that it will be difficult to pay the debt, government bonds will be sold and interest rates will soar. Such a concern is said to be unfounded in Japan, where 90 percent of its government bonds are purchased by domestic financial institutions.
However, my calculations show that the future looks extremely risky. Japan’s personal financial assets amount to about ¥1.845 quadrillion, but it’s hard to expect them to continue growing as they have in the past, due to such factors as the aging population. The ratio of foreign investors — who are more risk-sensitive — will thus increase.
In the latter half of the 2020s, loans from foreign countries will occupy a significant percentage of the debt. If anxiety over the budget deficit grows, the likelihood will increase of government bonds being sold and capital transferred out of the country. Situations such as a jump in the yield of government bonds may appear more likely as early as in the first half of the 2020s — a period expected to coincide with the implementation by the Bank of Japan of an “exit strategy” of normalizing the current large-scale monetary easing.
Q: What policies are in place to prevent a dire situation?
A: I want to emphasize that there is no other option but raising the consumption tax rate beyond 10 percent. In addition, such costs as pension, medical and nursing care also need to be significantly curbed. For example, the public nursing care insurance programs need to limit their eligibility for the elderly to only those whose nursing care level is comparatively high.
The pension age needs to be raised from 65 to 67. A review of terminal medical care can cut expenses by trillions of yen. Some will push back and say these are outrageous policies, but radical reforms would reduce spending on social security benefits by about 20 percent. This would allow the consumption tax to be held down to about 17 or 18 percent. This is the real situation.
‘Automatic’ raise needed
Q: Both raising the consumption tax and lowering the standards for social services will surely be hard for the people to accept, presenting a dilemma for the government, as it took 17 years to raise the rate from 5 to 8 percent.
A: My personal idea is to legislate a rule-based system to raise the consumption tax without politicians’ approval. For example, based on a forecast of social security spending, the government would be obliged to streamline social security services and to increase the consumption tax to cover tax revenue shortages for the services. If legislation is enacted to automatically raise the consumption tax, it will avoid an irresponsible state of affairs in which tax raises are delayed at politicians’ discretion.
Q: There was very little debate in the recent lower house election over the necessity of raising the consumption tax above 10 percent.
A: When the ruling party or bloc publicly pledges to raise the consumption tax, the opposition sets out to oppose it — this has not just happened in the last election. As a result, issues in elections have been repeatedly reduced to the question of whether to raise the tax.
The sole exception was when the Democratic Party of Japan was in power; the majority and minority parties had a shared awareness of the necessity of raising the consumption tax, and the three main parties agreed to raise it to 10 percent. But 10 percent is not the finish line — it’s merely a new start. First, every party should realize the grave reality of the budget deficit, and share a course of action for reform. They should then compete with policies related to the issue of whether to raise taxes, curb social services, or adopt a combination of both.
Vice Chairman of the Japan Research Institute
He joined the Japan Research Institute after working at then Sumitomo Bank. He was deputy director general at the Cabinet Office from 2007-09. He took up his current post in 2012. His books include “Zeiseikaikaku no Grand Design” (Grand designs for tax reform), which he wrote and edited, and “Zeisei Shakaihosho no Kihon Koso” (Basic concepts of the tax system and social security), which he cowrote.
An indicator that shows how much of the spending for such policies as social security and public works is covered by revenue from taxes and other sources. If it falls into the red, the gap must be filled with government bonds — or debt. The primary balance in the fiscal 2018 draft budget approved by the Cabinet on Dec. 22, 2017, has a deficit of ¥10.4 trillion.
(This interview was conducted by Yomiuri Shimbun Senior Writer Fumihiko Abe)