Policy Proposals for Fiscal Consolidation
― With the return to "a world with interest rates," the formulation and execution of a long-term plan cannot wait ―

Japan's fiscal situation has deteriorated significantly since the COVID pandemic. Going forward, with the return to "a world with interest rates," an increase in public debt service expenditures is inevitable for Japan, whose outstanding long-term debt (central + local) is more than double the country's GDP, so fiscal restructuring cannot wait.

Given this situation, Japan should take the following measures for fiscal restructuring:

(1) Determine targets for fiscal consolidation
The current fiscal consolidation targets, which are to achieve a primary-balance surplus and "at the same time, to aim for steady reduction of the public debt-to-GDP ratio," need to be maintained. But it is also essential to formulate a long-term plan that includes numerical targets and defines the period for reform.

(2) Set targets for expenditures
The government should continue to declare clear "expenditure targets." It will also be important to review methods of local-government financing with a view to getting local governments to operate primary-balance surpluses, and to set guideline numerical targets.

(3)Strengthen functions for assessing and monitoring fiscal discipline
It is vital to establish functions for objectively making macroeconomic and fiscal forecasts and describing the long-term outlook, monitoring the content of and adherence to fiscal plans and rules, and performing objective or critical assessments. Consideration should also be given to the possibility of introducing highly independent monitoring mechanisms of the like seen in many other countries.

(4) Determine rules for supplementary budgets and reserve funds
It is necessary to break away from the current situation where large-scale supplementary budgets and reserve funds have become the norm. Rules or regulations should be introduced to facilitate a return to the restrained spending that in fact ought to be the norm.

(5)Secure financial resources in the initial budget and allocate them to growth areas in a prioritized and focused fashion.
Effective fiscal policy will require a bold review of current resource allocation, and it will be crucial to make greater use of evidence-based policymaking (EBPM) and prioritize and target the allocation of financial resources to growth areas.

(6)Review people' cost burden and benefits
Regarding the cost burden on the public, it is important to spread the burden as fairly as possible among the people, focusing on the three core taxes of consumption tax, income tax, and corporation tax.

In documents such as its Basic Policy, the government should clearly present specific targets and execution structures for fiscal restructuring, and establish a framework that will allow steady progress toward fiscal consolidation to be made.

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