No. 1 — January 12, 1996


Weekly Review

--- by Jon Choy

As one of his last major official acts as prime minister, Tomiichi Murayama joined with his cabinet December 26 in approving for the year beginning April 1 a government budget plan that raises spending sharply but that critics charge will do little to help the economy. The initial general account budget for FY 1996 also contains some controversial items, such as public funds to bail out failed housing loan companies, that have generated opposition from the Japanese public. Beyond attracting criticism from observers for what it does include, the plan is being targeted by analysts because it does not contain measures that address some important long-term problems — tax reform, for example. The coalition government — made up of Mr. Murayama's Social Democratic Party of Japan, the Liberal Democratic Party and the New Sakigake Party — and the Ministry of Finance have been faced with an abundance of short-term problems, however, such as falling tax revenues and rising demands for additional stimulative steps. With mounting public speculation that elections for the lower house of the Diet will be called sooner rather than later — especially in light of Mr. Murayama's resignation — the fiscal policy debate for FY 1996 and beyond looks to be increasingly heated.

Four days of final negotiations in late December between Finance Minister Masayoshi Takemura and his cabinet peers culminated in ways to distribute the last ¥50 billion ($500 million at ¥100=$1.00) worth of public works funds in an initial spending plan for FY 1996 that totals ¥75.1 trillion ($751 billion). That amount is up a sharp 5.8 percent from the initial FY 1995 budget. At first glance a gain on this order would seem to indicate that Tokyo heard critics who have charged repeatedly that the government is not injecting sufficient fiscal stimulus into the torpid economy. A look at the details shows, however, that the government is being anything but bold. Discretionary outlays, for example, are set to grow just 1.3 percent in the initial FY 1996 budget plan (see Table 1). Although far better than FY 1995's initial 3.1 percent decline (see JEI Report No. 1B, January 13, 1995), this increase hardly is enough to assure that the economy will pull out of its prolonged slump, as the government has forecast (see previous article). In contrast, mandatory costs, such as interest on the national debt and transfers to local governments, are set to surge by 13.4 percent in the initial FY 1996 spending blueprint. Debt service alone is forecast to climb 23.9 percent, representing a little more than one of every five yen in the general account budget.

The jump in nondiscretionary outlays mainly is due to MOF's decision to transfer in the upcoming fiscal year the full amount required by law from the general account ledger to a special account to redeem outstanding government bonds. The Finance Ministry has been fudging the budget numbers over the past four years of sluggish economic and tax revenue growth by suspending the transfer; that, in turn, temporarily reduced the need for revenues to fund it. For FY 1996 MOF appears to be responding to critics who want greater transparency in the budget process. Thus, it is carrying out the transfer as required by law, presenting a more accurate and complete picture of the government's finances. Some analysts wonder, however, whether MOF's "honesty" in revealing the true size of the government's debts is aimed, instead, at countering further calls for stimulative fiscal measures.

There can be little doubt that the government finds itself in a tough fiscal situation. Revenues from taxes and stamps are estimated to decline by 4.4 percent in FY 1996 (see Table 2), as sluggish economic growth cuts this income source for the sixth consecutive fiscal year. Nontax revenues, such as customs fees and sales of government assets, are expected to plunge 42.9 percent, adding to MOF's headaches. In fact, all revenue sources except general revenue bonds are expected to put less money into the national treasury in FY 1996 than in the current fiscal year. Bond issues initially have been set at a record ¥21 trillion ($210 billion), thanks to a quadrupling of issues of general revenue or deficit-financing bonds. The government's reliance on borrowing for the general account corresponds to a shade under 28 percent of the initial FY 1996 budget, a sharp upturn compared to the past few years.

Even the initial FY 1996 Fiscal Investment and Loan Program, a second capital budget that the government has used in the past to augment fiscal stimulus, looks austere. The overall growth in outlays is set at just 1.9 percent (see Table 3), although revenues are expected to rise 11.5 percent. Many of the quasi-governmental agencies funded by the FILP are concerned about their futures; suggestions to downsize the government have included eliminating or merging these organizations. The handwriting indeed may be on the wall: the initial FY 1996 FILP calls for a 26.8 percent cut in funding for the Japan Railway Construction Public Corp.; a 24.8 percent drop in money for the Japan Development Bank; and 17.1 percent less for the Export-Import Bank of Japan.

What the FY 1996 initial general account budget most resembles is a round of "taking from Peter to pay Paul." While overall outlays for education and science are scheduled to receive just a 2.5 percent rise, for example, research and development promotion will benefit from a big 10.9 percent boost to ¥758.8 billion ($7.6 billion). In another example, public works spending funded through the general account is set to rise 4 percent to just over ¥9.6 trillion ($96 billion), while social welfare outlays to help workers cope with corporate restructuring will expand 11.6 percent to ¥327.7 billion ($3.3 billion). Other notable spending items include:

This last spending item has been a lightning rod for public criticism, particularly because of suspicion that the jusen did not act responsibly and perhaps even illegally when they extended loans. Aggravating this attitude is a late December analysis by Nihon Keizai Shimbun, one of Japan's top daily newspapers, that the FY 1996 initial general account budget will cost each Japanese citizen the following amounts:

Against the background of these numbers, it is not surprising that citizens additionally are outraged not only by the impression that some backers of the jusen are not bearing their fair share of the burden but by official auditor reports that government agencies wasted ¥24.3 billion ($243 million) in FY 1994. Furthermore, coming like salt in the wounds of taxpayers are comments by some leading politicians that the national consumption tax, now 3 percent, will have to be raised above the 5 percent rate now scheduled to go into effect in April 1997 in order to balance the budget. At the same time average citizens and financial analysts alike are becoming concerned that the rapid expansion of the government budget deficit is becoming a real threat to the country's long-term economic health. How to balance these conflicting and sensitive issues may well become a central, not easily resolved, focus of political debate.

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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