Balancing Industrial Policy and Fiscal Sustainability
－ Selection and Combination of Policy Instruments for Sustained Support －

Sustaining necessary investment requires clarity on the duration and form of industrial support, the conditions for review, the division of burdens between the public and private sectors, and future budgetary needs. With the submission of budget requests for FY2027 now complete, how to support the 17 strategic fields of Japan’s Growth Strategy has become a central issue in budget formulation. The government has established a “Strong and Prosperous Japan” Investment Framework, and aims to expand private investment and supply capacity through support based on multi-year plans, thereby pursuing a more ambitious industrial policy.

The selection and combination of policy instruments should reflect the factors that hinder investment and the stages of business development. The World Bank emphasizes choosing policy instruments according to government bandwidth, local market size, and fiscal space, and prioritizing public inputs such as basic infrastructure development. It also stresses discipline, i.e., reviewing support according to outcomes, and highlights the importance of withdrawing support. Meanwhile, Mazzucato and others present the idea of securing fiscal space by rethinking government procurement, returning profits from successful projects, and establishing institutions that support long-term investment. In Japan, too, while public inputs to correct market failures should be prioritized, it will be necessary to utilize not only subsidies, but also equity investment, loans, guarantees, public procurement, and regulatory and institutional reforms as appropriate. Additional fiscal burdens should be curtailed through the use of private-sector finance and recouped profits.

Putting these principles into practice requires policy outcomes and fiscal burdens to be assessed together. Expenditures with limited outcomes should be reduced or terminated, and the resources freed up, along with recouped profits, should be allocated to necessary investment. In doing so, policy outcomes and the recouping of public funds should be evaluated separately. Growth investment should emphasize productivity and value added, and crisis-management investment should emphasize the avoidance of losses from supply disruptions and other events. Decisions on whether support is required should not be made solely on the basis of profitability. At the same time, medium- to long-term fiscal projections that incorporate contributions to growth and tax revenue, as well as increases in additional expenditures and interest payments, will need to be updated regularly. Future increases in tax revenue and the recouping of investment should not be regarded as guaranteed, and assessments of individual projects and the fiscal outlook for the government as a whole should be reflected in budget formulation.

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