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Groundwork for a Deeper Discussion on the Reduction of Subsidies

October 3, 2008

Overview

Amidst growing pressure to reduce wastage in government expenditure, one of the key areas of spending under scrutiny is national government subsidies, which amount to some ¥27.6 trillion (as of the fiscal 2007 budget). While some claim that as much as ¥10 trillion of wastage could be eliminated, others believe cutbacks have already reached their limit. As yet, the discussion has no quantitative basis, and, with a view to promoting a debate based on quantitative evidence, the Business Strategy Research Center set about identifying candidates for reduction by clarifying the content and details of subsidies, etc., which are complex and difficult to understand, chiefly by recounting the individual subsidies listed in the "Fiscal 2007 Comprehensive List of Subsidies". For the purposes of this discussion, "wastage" was defined, in general terms, as the portion of subsidies, etc. paid by the national government to local governments in respect of public works projects which exceeds requirements, e.g. subsidies for the building of roads and bridges to higher specifications than actually required, subsidies paid to public interest corporations which do not appear to perform any essential work and which seem to exist for the purposes of amakudari (the practice of giving government officials lucrative jobs in the private sector or public corporations after retirement), and subsidies, etc. in respect of social security benefit payments to well-off people. As opinions on social security- and education-related subsidies differ considerably, subsidies in these areas were omitted from the scope of this inquiry. The major findings were as follows.

Of a total of approximately ¥23.0 trillion in subsidies, etc. paid under the General Account, some ¥17.2 trillion was disbursed by the Ministry of Health, Labour and Welfare (MHLW) and the Ministry of Education, Culture, Sports, Science and Technology. The subsidies paid to local authorities in particular, included payments to cover social security-related costs and national treasury contributions to compulsory education costs, respectively ¥11.8 trillion and ¥1.9 trillion, and were excluded from the scope of the inquiry. Of the ¥4.6 trillion in subsidies, etc. paid under the Special Accounts, ¥0.5 trillion paid to local authorities under the Pensions Special Account, which falls under the auspices of the MHLW, and other similar subsidies were also excluded.

The bulk of the subsidies, etc. paid to local authorities under the General Account and Special Accounts other than by the two above-mentioned ministries is accounted for by national treasury contributions to grant-aided projects for the creation and improvement of social capital sponsored by the Ministry of Land, Infrastructure and Transport, the Ministry of Agriculture, Forestry and Fisheries, etc. Some observers claim that costs could be cut if grant-aided projects were to be abolished, the sources of revenue were transferred in bulk from national to local government, and social capital projects local governments were allowed to run their own social capital projects rather than having to conform to national government specifications. The national and local governments contribute some ¥7.83 trillion of the funding for such grant-aided projects. The individual projects included within this sum of ¥7.83 trillion should be scrutinized to determine whether or not costs can be reduced.

The total amount of subsidies, etc. paid to recipients other than local authorities, under the General Account and the Special Accounts, is ¥8.6 trillion. According to government figures, this breaks down as ¥1.7 trillion paid to authorized corporations, ¥3.2 trillion to independent administrative institutions, ¥1.3 trillion to national universities, and ¥2.3 trillion to private sector organizations, etc. Of these, subsidies to national universities do not match the definition of wastage used in this inquiry. Similarly, it would be difficult to make significant reductions in subsidies, etc. to authorized corporations, which include employer's contributions that the government, as employer, pays into the National Public Service Employees Mutual Aid Association, the social security scheme for national public service employees.

Although the total amount of subsidies paid to independent administrative institutions is ¥3.2 trillion, a breakdown reveals that the leading recipients include a great number of such as the Japan Aerospace Exploration Agency (JAXA) and other research organizations, the former Japan Scholarship Foundation and other "benefit intermediary" organizations. Although these receive subsidies, etc. from national government, the benefits go to the people of Japan rather than the organization itself. There is room for discussion as to whether or not these subsidies constitute wastage and should be abolished. The subsidies, etc. received by the independent administrative institutions, which do not belong to either of these two types of recipient, are more likely to constitute wastage than the subsidies received by these two types, come to a total ¥1.25 trillion. This should surely be considered for reduction. The recipients of subsidies listed as "private sector organizations" not only in the "Comprehensive List of Subsidies" but also in other documents submitted to the Diet, include incorporated associations, incorporated foundations and social security-related organizations, and there is scope to consider reducing the subsidies these receive. It is vital that subsidies be discussed in greater depth. The subsidies to be considered for reduction will probably come to ¥0.45-0.55 trillion.

There are limits to the capacity of the current framework of budget reductions, audits, etc. to cut the wastage latent in the subsidies identified in this report as candidates for reduction. With fundamental reviews of the division of labor between national and local governments and of the structure of the social security system already under way, Japan also needs to take a radical approach to the reduction of subsidies, etc.

For more information on the content of this report, please contact Kazuhiko Nishizawa, the Japan Research Institute, Limited.

Tel: 03-3288-4524
E-mail:matsumura.hideki@jri.co.jp

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