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Don’t base financial reform on optimistic assumptions of high growth

The Yomiuri ShimbunHow can the government create an environment conducive to achieving a plan that has repeatedly been put on the back burner? It is essential to adopt an approach that jettisons optimistic assumptions and tenaciously pursues solid targets.

The government has started deciding on new fiscal consolidation plans designed to restore Japan’s public finance, which is the worst among advanced nations. These plans will be incorporated in the Basic Policy on Economic and Fiscal Management and Reform (the so-called large-boned policy) to be compiled in June.

The new policy is expected to push back achieving a surplus in the primary balance, an indicator of the government’s ability to cover its policy expenses without relying on issuing new bonds, from the original target of fiscal 2020 to fiscal 2025.

Plans for a primary balance surplus have been trumpeted since the early 2000s, but even in fiscal 2017 the nation posted a deficit of ¥18.5 trillion. While the nation has been buffeted by events beyond its control, such as the financial crisis triggered by the collapse of Lehman Brothers and the March 2011 Great East Japan Earthquake, fiscal discipline has undeniably been neglected at times.

If the new basic policy assumes a high nominal economic growth rate in the 3 percent range, as has previously been done, it could lead to problems.

Provided high economic growth continues, hefty tax revenue increases can be expected. However, the potential growth rate — an indicator of the real strength of the economy — has hovered at around 1 percent. It is unrealistic to forecast sustained annual growth of 3 percent.

The government’s aim of achieving robust growth in the nation’s gross domestic product is understandable. Even so, with regard to fiscal reconstruction, making tax revenue estimates based on steady economic growth rates will be the first step to a plan worthy of trust.

Don’t skirt necessary reforms

The new policy is likely to introduce a fiscal-deficit-to-GDP ratio as a medium-term objective that precedes the primary balance surplus. As long as GDP increases, the deficit-to-GDP ratio goes down, but the deficit itself does not decrease.

There have been calls within the government for more public spending to prepare for the October 2019 increase in the consumption tax rate to 10 percent and the expected economic slowdown after the 2020 Tokyo Olympics and Paralympics.

It is vital that the cost-effectiveness of economic policies is closely examined.

The largest expenditure issue is the cost of social security, which continues to snowball as the nation’s population ages.

A plan to cap the total growth in social security expenditures for the three years from fiscal 2019 to fiscal 2021 at about ¥1.5 trillion is being considered. This would be at the same level as a policy for curbing the increase in social security costs from fiscal 2016 to fiscal 2018.

In 2025, all the baby boomers will be aged 75 or older, and a surge in medical and nursing care expenditures is expected.

Calling on elderly people who have enough leeway to shoulder a greater financial burden and, where necessary, reviewing the scope of nursing care and other services covered by public insurance — consideration of such reforms cannot be avoided. A further hike in the consumption tax rate in the future should also be in the frame.

Squarely facing up to future visions of the tax and social security systems is necessary for establishing a sustainable public finance.

(From The Yomiuri Shimbun, May 16, 2018)Speech



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