Japan: the public debt

[Eubulides <paraconsistent@xxxxxxxxxxx>]

The Japan Times: Jan. 27, 2004
EDITORIAL
Defuse the debt bomb

Japan's public debt continues to swell ominously, yet there is no
reassuring long-term scenario for deficit reduction. The government's
latest medium-term outlook for economic and fiscal reform amounts to a
tacit admission that the balanced budget is, at best, a distant goal.

The numbers boggle the mind. The government's debt load -- the amount of
outstanding bonds -- already exceeds 400 trillion yen. And the total
amount of long-term debt owed by the central and local governments is
estimated to reach 720 trillion yen by the end of March 2005. That equals
about 140 percent of the nation's total economic output.

All of this illustrates how difficult it is to cut deficits, particularly
in a period of economic stagnation. In fact, borrowing has increased
exponentially since the bubble burst in the early 1990s. As a result, the
share of bond issuance in the national budget ballooned from 9.5 percent
in 1991 to 44.6 percent in 2003.

Japanese government bonds divide into two types: "deficit bonds," or
special bonds, for covering operating expenses and "construction bonds"
for financing public-works projects. Underscoring this difference is the
traditional notion that deficit bonds are "bad" for fiscal health but
construction bonds are "good" because they leave tangible assets to future
generations.

That is why previous administrations tried hard to eliminate deficit-bond
issues, beginning in the early 1970s. These attempts, in fact, succeeded
in the boom years of the late 1980s. In the 1990s, however, debt of this
type snowballed as recessions eroded the tax base. Deficit bonds now make
up most of the annual debt issue.

No doubt Prime Minister Junichiro Koizumi faces a more daunting challenge
than his predecessors. Reality has already trampled his promise to cap
bond sales for fiscal 2003 at 30 trillion yen; in fiscal 2004, more than
36 trillion yen worth of new bonds are scheduled for sale. Reducing them
gradually over the long haul seems to be the only feasible option, but
there is also a pressing need to produce concrete results in a reasonable
period of time.

So the Koizumi administration is taking a new approach: creating a budget
surplus in the "primary balance" in the early 2010s -- a basic balance
that excludes the debt factor from the equation: bond issuance on the
revenue side and debt service on the spending side. The primary balance
can be likened to an essential family budget that leaves out extraordinary
items such as consumer loan and mortgage payment.

A "primary surplus" seems achievable, provided tax revenues continue to
expand -- a condition that hinges on private-sector recovery in the years
ahead. According to estimates by the Cabinet Office, which are based on
the economic and fiscal outlook, the economy will grow about 2 percent a
year in real terms through fiscal 2008. Consumer prices will begin to rise
in fiscal 2005, and deflation -- the general decline in the prices of
goods and services -- will end in fiscal 2006. Tax revenues will increase
slowly but steadily.

As a result, the combined primary balance of central and local government
budgets will improve gradually over the next decade, moving from a large
deficit in fiscal 2004 (equal to 4.6 percent of gross domestic product) to
a small surplus in fiscal 2013 (0.1 percent of gross domestic product). If
this actually happens, it will mark an important step toward restoring
fiscal health.

The larger question is how to go from the primary balance to the real
balance. The prospect is grim: Annual debt issues are projected to remain
at well above 30 trillion yen at least through fiscal 2008. A positive
primary balance will slow, but not reverse, the pace of debt accumulation.
Deficit bond issues are reaching such enormous proportions that ending the
practice is no longer a realistic goal, at least for the foreseeable
future.

The sense of crisis is compounded by the fact that the government still
has no workable strategy for defusing the debt bomb. The danger, which
many seem to play down in these times of zero interest rates, is that the
day of reckoning will come sooner or later unless the problem is tackled
in earnest.

The golden rule for fiscal management -- matching spending with revenue --
cannot be overemphasized. It is imperative, therefore, to pursue a two-way
budget. On the one hand, spending priorities must be reordered boldly; on
the other hand, tax revenues must be increased substantially. Inevitably,
the people will have to bear a greater burden. With the economy in the
slow lane, winning public acceptance is going to be especially difficult.
But the alternative would be fiscal disaster.