Sunday, July 20, 2008

Six-Fold Jump in Priority Spending Will Not Change the Narrative for Fukuda Administration

The media reported today that Finance Minister Fukushiro Nukaga has indicated that the Fukuda administration will expand the Budgetary Provision to Promote Prioritization (BPPP) (Juutennka Sokushin Kasan Waku) for the FY 2009 General Budget to 300 billion Yen, up from 50 billion yen in FY 2008. Sounds impressive? But the real significance of this message is that the Fukuda administration will not be conducting a serious overhaul of government expenditures, and therefore will be unable to make a strong case that a consumption tax hike is justified as part of a thoroughgoing tax reform package. I believe that this more or less reinforces my 4 June assessment of the prospects for the Fukuda administration and the ruling coalition. Let me explain.

First, a few facts about the General Budget. Of the 83.1 trillion yen in total expenditures for FY 2008, 20.1 trillion yen go to servicing the government debt while 15.6 trillion yen cover mandatory transfers to local governments. Of the remaining 47.3 trillion yen—called general expenditures—21.8 trillion yen fill the gap between social security (public pension, healthcare/medical insurance) premiums and expenditures. Further subtract civil servant salaries and other overhead, and the Japanese government is left with about 15 trillion yen that are considered discretionary.

Every year, usually in August*, the administration imposes by Cabinet decision overall and ministry/agency-specific ceilings on the following year’s General Budget expenditures. Each ministry/agency gets more or less the same share each year, after accounting for 1% reductions in defense and education expenditures respectively and the annual 3% reduction in public works and other discretionary expenditures. The Koizumi administration initiated this mandatory reduction process. The Fukuda administration persists despite grumbling from the party rank-and-file.

The ceiling-cum-pro-rata-reductions are an effective way to reduce government borrowing. But the rigidity of the system makes it difficult for any administration to implement policy initiatives of its own. The BPPP is an attempt to overcome this defect by setting aside funds to allocate to priority issues over and beyond the individual ceilings.

For FY 2009, if all goes well, the Ministry of Finance will be allocating 300 billion yen to the Fukuda administration’s priority issues—eliminating the doctor shortage, combating climate change, developing next-generation technology—over and above the budgetary ceilings imposed on each ministry and agency by Cabinet agreement on 29 July. That sounds like a lot of spending money for Prime Minister Fukuda, until you remember that it’s only one five-hundredth of the 83 trillion yen FY 2008 General Budget. And how will the Fukuda administration come up with the 300 billion yen? According to reports, Mr. Nukaga intends to impose an across-the-board 2% cut on the entire 15 trillion yen in discretionary expenditures, including the up-till-now untouchable R&D expenditures.

So, the Fukuda administration will be able to reduce discretionary expenditures by a little less than 300 billion yen, and reshuffle 300 billion more between ministries/agencies, if all goes according to plan,. So, this is the expenditures overhaul that will serve as the backdrop to the “thoroughgoing tax reform” that Prime Minister Fukuda has promised for this autumn. “Thoroughgoing tax reform”, of course, is a euphemism for “raising the consumption tax” to cover a legally mandated two and a half trillion yen hike in the General Budget subsidy to the national pension system starting in FY2009. Do you see the Japanese public buying this? I don’t.

On the other side of the political aisle, the DPJ has been talking down expectations in the face of the 18 trillion yen price tag on its policy manifest and subsequent on-the-fly promises. Ozawa’s kagemusha Kenji Yamaoka and dissident Seiji Maehara were both on message today, as they appeared together to talk about the time it will take to implement the DPJ manifest and its future incarnations, as they root out the multi-trillion excesses accumulated over the years under the LDP-Komeito regime. Translation? Don’t hold us to any timetable.

Flip-flopping? Sort of. But I suspect that the emergent realism in the DPJ will be reassuring to the independent voter and will compare favorably to a ruling coalition that is unable to change its ways.

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