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News Release

The Need to Reconsider a Policy of Government Finance
Reform Based on the Reduction of Benefits
- Japan's social policy expenditure lowest among the developed nations -

May 31, 2006

Overview

The debate on how to restore soundness to government finance is growing in intensity. Given that it will be difficult to solve the severe revenue shortfall solely by cutting expenditure, and that additional revenues will be required,the extent to which the public burden can be increased has come to be regarded as a key issue. However, there are problems with the way the debate has been conducted to date. First, the debate has become stunted. Although a range of combinations, from high-burden/high-welfare to low-burden/low-welfare or from big government to small government, could be explored,the discussion has been confined to the three options of (i) increasing the burden while maintaining the current level of benefits, (ii) increasing the burden to some extent while reducing benefits to some extent and (iii) keeping the burden at its current level while reducing benefits. There are also problems with a debate based on the assumption of a reduction in expenditure combined with benefit cuts.

A comparison of the scale of total revenue and total expenditure for all sectors of government reveals that Japan's public burden is the smallest and its revenue shortfall is the largest among the major developed nations . It would therefore be natural to assume that the people of Japan enjoy greater economic affluence than the citizens of other countries.
However, a comparison of annual consumption expenditure per household in Japan, the United States and Germany reveals that, on the contrary, the economic affluence enjoyed by the people of Japan may be lower than that in other countries . In Japan, spending on education and food, which both have a highly essential character, is high, but housing-related expenditure, which is an indicator of standard of living and accounts for the largest proportion of consumption expenditure, is the lowest.Moreover, living conditions are the least good among the three countries .
On this basis, especially in the individual sector, there is limited scope for increasing the public burden above its current level. A major increase would be likely to lead to a serious fall in the standard of living.

The notion that Japan's public burden is the lowest and that its revenue shortfall is the highest among the developed nations, and that the economic affluence enjoyed by the people of Japan is lower than that in other countries, and that there is limited scope for increasing the public burden may at first appear to be a contradiction in terms. The burden of education costs is an excellent key to resolving this apparent contradiction. Even if the public burden grows lighter, as long as spending on essentials rises by a corresponding amount, the economic affluence of households will not increase. Likewise, even if the public burden grows heavier, as long as the benefits paid by the government to the people increase and the need for spending on essentials is reduced by a corresponding amount, the economic affluence enjoyed by households will not be reduced. If anything, provided income distribution and safety-net functions are strengthened, so that the people of Japan are able to live in peace of mind, and if more opportunitiesfor the creation of new industries are opened up, and Japan's economic vitality increases, a high-burden/high-benefit approach could be the best. One case in point is the success of measures to combat falling birthrates adopted in France and the northern European nations in recent years, which have been based on measures to promote employment and measures to support education, including higher education.
A comparison of social policy and education expenditure in the major developed nations reveals that Japan's government is small and that its spending in every area of government, except medical and health care expenditure, which are virtually equal to those of the other nations, is the smallest among the developed nations, alongside that of the United States . However, in areas other than benefits to the people, Japan's government is bigger than that of other developed nations. In the 1990s, most countries increased benefits to the people while implementing reforms in other areas of government activity . Japan could still avoid an increase in the public burden by reducing expenditure in areas other than benefits.

In this light, it would appear that Japan's first recourse, in its efforts to restore soundness to government finance, should not be to reduce benefits to the people, but to make substantial reductions in other areas of expenditure. The government should use these reforms to secure popular acceptance of a shift away from big government and for the linking of burden to benefits, and take steps to establish a popular consensus with regard to the new framework of burden and benefits for which Japan is to aim.

For more information on the content of this report, please contact: Hideki Hidehiko Fujii the Japan Research Institute, Limited.

Tel: 03-3288-4615
E-mail:fujii.hidehiko@jri.co.jp

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