No. 30 — August 4, 2000


Weekly Review

--- by Jon Choy

Japan's coalition parties and the Ministry of Finance have begun the process of drawing up the general account budget for the fiscal year beginning April 1, 2001 by setting overall spending guidelines and objectives. Spurring the economy remains Tokyo's primary goal, say Prime Minister Yoshiro Mori, Finance Minister Kiichi Miyazawa and top officials of the Liberal Democratic Party, the New Komeito and the New Conservative Party. Their words will be backed in FY 2001 by a ¥1 trillion ($9.1 billion at ¥110=$1.00) special reserve for public investment.

Aggressive stimulus was a keystone of fiscal policy throughout the 1990s, but a lack of results and growing concerns about the long-term impact of big and continuous budget deficits have tempered policymakers' enthusiasm for this macroeconomic tool. Their more cautious attitude can be seen in the Mori government's reluctance to commit to a supplemental budget for the current fiscal year. Mr. Miyazawa and other cabinet members have said for months that no decision will be made until after the September release of gross domestic product figures for last spring. If the economy appears to be backsliding, a supplemental budget can be drawn up quickly. With this short-term issue taken care of, Tokyo has begun considering its future fiscal policy course.

The Mori cabinet decided August 1 to hold discretionary spending in the FY 2001 general account budget to about the same level as in the current spending plan, or some ¥48 trillion ($436.4 billion) (see JEI Report No. 1B, January 7, 2000). Public works outlays will be maintained at just over ¥9.4 trillion ($85.5 billion), while social welfare costs will rise by some ¥700 billion ($6.4 billion) because of increasing medical and home health-care costs for senior citizens. The Ministry of Finance is working on projections for the cost of servicing Japan's huge outstanding national debt and for revenue-sharing with local governments. These estimates plus discretionary spending will provide the framework for general account budget requirements in the coming fiscal year.

A highlight of the FY 2001 budget guidelines is the doubling of a special public investment reserve fund from this fiscal year's ¥500 billion ($4.5 billion). Initially, Finance Ministry budget planners had penciled in ¥600 billion ($5.5 billion) for projects designed to spur the economy's recovery and provide the foundation for long-term growth and ¥300 billion ($2.7 billion) to improve the quality of life in Japan. Under pressure from the LDP and its partners, however, another ¥100 billion ($909.1 million) was added to the pot for economic revitalization. Economic Planning Agency Director General Taichi Sakaiya said that the extra spending would lift the change in real GDP by 0.2 percentage point in FY 2001.

When introduced by the late Prime Minister Keizo Obuchi in the FY 1999 budget, the public works reserve fund was considered an innovation. It broke with the entrenched practice of dividing government investment money among a few ministries according to a fixed, traditional formula; instead, any ministry or agency could submit project proposals. In addition, project awards were to be the result of an open and competitive process, the antithesis of the standard approach. Furthermore, the reserve fund was designed to achieve specific, forward-looking goals set by the administration, such as the development and the introduction of advanced communications networks and the reduction of environmental problems. Although the ¥500 billion ($4.5 billion) pool of money represented only a small portion of the government's total investment budget, the Obuchi initiative promised to introduce greater transparency, rationality and accountability into an area where business usually was conducted behind closed doors.

The special fund's debut year went well. The Obuchi cabinet fielded proposals from nearly every ministry and agency and selected those that it determined would contribute the most to achieving the program's stated goals. The experiment was written into the FY 2000 spending plan at the same ¥500 billion ($4.5 billion) funding level before Mr. Obuchi suffered an ultimately fatal stroke and the premiership passed to Mr. Mori.

The Mori administration's handling of the reserve fund for FY 2000 has encountered pointed criticism. The proposed allocation for the current fiscal year was announced June 2, the same day that the lower house of the Diet was dissolved for elections, leading to accusations that the prime minister was using the set-aside program for political advantage. This assertion was buttressed by some of the details of the planned disbursement: ¥100 billion ($909.1 million) was to be spent on new Shinkansen (bullet train) construction and another ¥50 billion ($454.5 million) was earmarked for improvements in agricultural infrastructure.

Analysts derided these choices as old-fashioned pork-barrel spending, entirely unrelated to the fund's stated purpose of financing forward-looking projects. These critics also pointed out that only 4 percent of the pool of money was allocated to environmental protection and an even measlier 2 percent was aimed at strengthening Japan's information technology infrastructure. The Mori cabinet took heat as well for the nontransparent way in which it decided how to spend the funds.

The angry outburst led the coalition to reconsider. When the cabinet voted July 25 on a final division of the FY 2000 reserve fund, the outcome was quite different. IT projects received ¥50 billion ($454.5 million) instead of the original ¥10 billion ($90.9 million), and spending on Shinkansen construction was slashed to ¥56 billion ($509.1 million). In addition, ¥89.6 billion ($814.5 million) will go toward disaster relief to help communities recover from several volcanic eruptions and earthquakes that have occurred around the Japanese archipelago within the past several months.

The Mori administration highlighted several projects to underscore its commitment to boosting Japan's technology base: ¥2.2 billion ($20 million) to build a traffic-monitoring network, ¥6.9 billion ($62.7 million) to install a fiber-optic grid as part of the government's intelligent-vehicle project and ¥1.6 billion ($14.5 million) for local governments to develop information networks. These changes have not mollified critics, however, and opposition Diet members promise to press the coalition to reveal its decisionmaking process during the special session (see previous article).

The proposed doubling of the public investment set-aside program in FY 2001 also has sparked debate. The constitution allows the cabinet to create special reserve funds "to provide for unforeseen deficiencies in the [regular] budget." Some analysts argue that the only part of the Mori cabinet's FY 2001 plan that meets this criteria is the disaster-relief money. Since the decisionmaking process seemingly has become politicized and opaque, critics have begun calling for the abolition of the reserve fund before it becomes just a different aspect of the government's traditional public works system. Politicians no doubt will fight to retain this new source of fiscal influence.

Based on the cabinet's FY 2001 general account budget guidelines, ministries and agencies will draw up spending requests for submission by the end of August. The Finance Ministry will aggregate these plans and then begin negotiations with each ministry or agency to bring its budget into line with the ceiling on discretionary outlays. In typical fashion, the process should wrap up in late December when MOF presents a draft general account budget to the cabinet, which probably will make some minor adjustments before approving it and sending it to the Diet.

The FY 2001 budget cycle likely will be the final iteration of this traditional process. Budget responsibilities are scheduled to be transferred January 1, 2001 from the Finance Ministry to an Economic Advisory Council that will be part of a new Cabinet Office (see JEI Report No. 27B, July 16, 1999). The EAC will be composed of cabinet ministers and citizens; neither MOF bureaucrats nor noncabinet members of the Diet will participate in its work. Finance Ministry mandarins consider these omissions to be a major drawback of the coming budget process. They have sought to preempt the EAC by backing the new Fiscal Panel, which Mr. Mori used his executive authority to create. The raison d'etre of this group — to be chaired by the prime minister and consisting of cabinet members, private-sector representatives and politicians from the ruling party (or parties) — is to compile the budget.

MOF clearly hopes that the Fiscal Panel will make the EAC seem superfluous, undercutting the influence of an organization that, on paper, will be superior to the renamed Ministry of the Treasury. Current budget officials say that they mainly are worried that the LDP will feel free to overrule the EAC's decisions since the party will have no say in the council's deliberations. Government-reform advocates counter that the answer is not to create a competing budget-drafting mechanism but to broaden the EAC's membership to include representatives of the ruling party, perhaps by appointing them as ministers without portfolios. Thus, while Tokyo may have succeeded in setting the nation's spending policy on a steady near-term course, Japan's budgetary decisionmaking apparatus appears to be headed for stormy waters.

The views expressed in this report are those of the author
and do not necessarily represent those of the Japan Economic Institute

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