When do budget deficits become a problem?


1. The state budget

In 1996 Japan had a budget deficit of 7.4% of national product, the highest Deficit among the OECD countries. However, it is questionable whether the official data accurately reflect the real burdens on government finances:

* Efirst are the deficit Social Security Surplusesincluded, which will decline drastically with the "maturation" of the pension insurance, which was not completed until the 1970s, and the rapid aging of the population. These surpluses are offset by future payment obligations, so that a cost dynamic is built into the state budget, which further increases the deficit becomes.

* Secondly there are quite a few "ParaCountrylicher "deficitsthat are not yet included in the official budget deficit, but will continue to swell it in the future. To be mentioned are among others

- the railroad company, privatized in 1987 Japan National Railwhose debt amounted to 4.8 trillion yen (DM 70 billion) from the JNR Settlement Corp. were taken over; JNR Settlement was supposed to reduce this debt through the sale of stocks and land, but the sales, which will be completed in 1998, raised only 800 billion yen. In March 1999 the bonds of JNR settlement be included in the state budget;

- a similar burden is imposed by the Corporate Credit Purchasing Corporation (CCPC) which was founded in 1993 to buy up bad loans from banks and to repay them by selling the real estate brought in as collateral. So far, however, the CCPC has only been able to cover a fraction of the loans acquired through property sales. In 2003 it is to be dissolved; the remaining obligations will then in all likelihood also be transferred to the state budget deficit;

- the old debts of the mortgage banks that went bankrupt in 1996 (Jusen)by the successor organization Housing Loan Administration Corp. to be removed, turn out to be far more extensive than was expected a year ago.

There are two arguments that aim to de-dramatize the problem of the Japanese budget deficit:

* On the one hand, Japan has among the entwickelten countries still have the highest savingsrate. It so there is no problem with the housefinancial deficit through internal savings to finanadorn. Because Japan still a hoIf the current account surplus shows, the budget deficit even has a positive effect: it helps to reduce the surpluses of internal savings over the investition and thus the current account surplustoconstructionen. Equalbut yes remains earlypan at one extremely low interest rate. The centralBankinterest rate is 0.5% and the rendite on state Bonds at 2.5%. In view of the interest rate difference to the USA, the national debt can only be financed from internal savings because the Japanese financial system still is relatively closed. But this - here the reform of the state budget overlaps with that of the financial system - is to change in the near future. If the financial system is opened up, the government will face the alternative of either raising interest rates to international levels - which is what the government does bubble economy would get troubled banks in trouble - or reduce the budget deficit quickly.

* The second argument is directed to the Creation of the state new schoolmanure: It is the result of several economic stimulus programs after 1992 (when the state budget showed a surplus of 2% of the national product). Economic stimulus programs, especially public construction projects, can - so the argument goes - be reduced more easily than state social spending, which is very difficult to reduce in view of legal obligations and pressure from interest groups. However, it would be objectionable that the pressure of the construction industry, which is closely allied with the LDP politicians, is to be assessed as much higher in Japan than that of the social interest groups.

The question is also whether the state Konjunkdoorprograms in the oppositewould betigene Situation without serious consequencesgen for the hostshankgrowth degraded whothe can. In 1996, growth was heavily dependent on government spending and investment in housing construction determined by tax and interest policies. This is where the current recovery differs from previous cycles. A comparison of the current economic situation with five previous economic turning points in the post-war development shows that the recovery was initiated in all cases by the politically determined demand components of government spending and housing construction; In the five preceding recovery phases, however, the growth in politically determined demand quickly induced that of the independent components of demand: private consumption and private investment reacted with a delay of just a few months to the initial spark in government spending and housing construction. Today, however, the politable determined afterfrage hedraws bein front the spark on private consumption and investmentsprincould gen.

Index of politically induced and private demand in 5 previous recovery phases

Quarters (turning point = 100)
* Government spending and housing
** Private consumption and investment

Index of politically induced and private demand in the current business cycle

Quarters (turning point = 100)

The legal problem of the budget deficit is, among other things, that the new indebtedness exceeds the volume of the publicleftwork - which is prohibited by law. The deficit in public works is made up of legal ones Construction bonds financed, while in principle not permissible for new borrowing going beyond this Deficit Covering bonds issued, the emission of which must be approved by Parliament. Deficit Covering Bonds the government first had to spend in 1975 to cover the high costs of the rapidly expanding social security systems. Despite the initially envisaged limitation of one year, between 1975 and 1989 the government had to legalize new emissions of Deficit Covering bonds apply for. Only in 1990 did the household situation improve so much that Construction bonds sufficient to finance the deficit again. The return to legal deficit financing was of course paid for at a high price: it took an austerity policy that was effective for 15 years to get the Deficit bonds to stop. The public reacted all the more critically as a few years later Deficit Bonds were issued.

The Hashimoto government has announced that the budget deficit will be 3.0% of the fiscal year 2003 National product toobacktostarting with the 1998 budget. So far from the Cabinet enacted rules for budget preparation (The negotiations on the budget for the next fiscal year start on August 31 of each year, when the ministries present their requirements) see alNot like a reform, but like one traditional cut policy:

- Government spending is to be cut by 240 trillion yen across the board;

- Social security spending growth will be limited to 300 trillion yen;

- Official development aid will be cut by 10%;

- Defense budget frozen at 1.16 trillion yen;

- the expenditure for public works should be reduced by 7%.

- The compensation that the farmers are to receive for the partial opening of the rice market in the wake of the Uruguay Round will be stretched.

Nevertheless, new approaches can be identified in two ways. First is with the tradition of the Ministry of Finance decreed budget ceilings Broken. In the past, the Ministry of Finance had set the same (negative in several years) spending limits for all ministries. The equal treatment of all departments restricted the budgetary room for maneuver, but under the given conditions was the prerequisite for the cuts to be implemented at all. For the 98 household, however, Hashimoto has in advance for keybereiche Spending targets set at 550 trillion yen, which are not affected by cutsmay be metfen. It handelts as "Strategic" designated areas such as FoResearch, Telecommunication and Umworld protection (150 trillionnen yen), transportation and distribution infrastructure (150 trillion yen) and investments in the "quality of life", especially sewage systems and urban entwicklung (250 trillion yen).

The zexpanse Innovation concerns the budgetary initiative: instead of the finance ministry, the prime minister himself has made the decisive decisions. In doing so, he not only signaled the high priority of budget restructuring, but also expanded the sphere of influence of the Prime Minister's office.

The Japanese national budget offers opportunities for reforms in two ways. First is currently the reform or even abolition of the "second state budget", the Fiscal Investment and Loan Program debated that a relief factor threatens to become a burden on the state budget (see Section 4). Secondly is the Japanese tax system by a particularly low level of indirect taxes characterized on goods and services. A general consumption tax of 3% was only introduced in 1989 and raised to 5% in April of that year. With the increase in Verneedtaxern on a European level would be the state budget deficit is falling very quicklylet build. At the same time kämen higher verutility taxes to tax justicequality: Employees and companies are burdened comparatively heavily in the Japanese tax system, while small self-employed, farmers, small industrialists, retailers, etc. pay little or no taxes. In 1992, for example, 87.6% of all employees including public employees (45 million people) paid income taxes. Of the self-employed only 44.2% (6.9 million people) and of the farmers only 19.5% (1.2 million) paid income taxes at all.

Most important government revenues in% (1990)


United States


























Social insurance
















16 2,





* Goods and services

Higher indirect taxes, possibly combined with a reduction in income taxes, would alleviate this inequality. The problem, however, is that the Tax system Begünstigout the core of the LDP clientelemachen. The introduction of the general consumption tax in 1989 cost the LDP a majority in the upper house for the first time. Any LDP-led government will therefore be very careful about raising indirect taxes. Nonetheless, the Hashimoto government appears to be targeting further tax hikes; Government spokesman Muto has already publicly doubted that Japan would be able to do without an increase in consumption tax above 10%.

© Friedrich Ebert Foundation | technical support | net edition fes-library | April 1999