Friday, July 30, 2010

How Useful Is the Lower House Predominance on Budget Bills?

Not much, it turns out.

In the Japanese Diet, it takes a supermajority of two-thirds in the lower house to override an upper house rejection of a legislative bill. However, in the case of a budget bill, the decision of the lower house by a simple majority prevails if the two houses disagree. This is obviously designed to allow the business of government to continue in the case of a standoff. But it doesn’t quite work out like that in real life.

There are two categories of legislative bills submitted by the cabinet: budget-related and non-budget-related. Budget-related bills are bills that are necessary to execute parts of the budget*. Some of the budgetary links are tenuous and no doubt can be worked around with ease**. However, others are harder to do without. One major example is the plethora of business tax breaks, which collectively keep the effective corporate tax rate well below the nominal cumulative effect of the national and local corporate income taxes and other major business taxes. Must such tax breaks have relatively short time limits. Thus, they will disappear unless the Diet passes legislative bills that extend them or convert them into other forms***.

Now, some anti-businesses will say, good for them. But even unreconstructed socialists will balk at the thought of the government going bankrupt well before the end of the fiscal year. And that is exactly what will happen to the cash-strapped Japanese government unless the Diet passes the mother of all budget-related legislative bills.

Under the Public Finance Act, the government can only issue bonds to cover expenditures for public works, funding****, or lending. Therefore, each fiscal year since 1994, the Diet has passed a special dispensation bill that authorizes the government to issue deficit bonds to cover the projected revenue shortfall in the general account budget. In FY 2010, the shortfall is projected to be 44 trillion yen out of the projected revenue of 92 trillion yen*****. Things are unlikely to get any better in FY2011. Without a special dispensation act, my guess is that the government will literally run out of money by the end of calendar year 2011.

As a practical matter, the budgetary prerogative of the lower house is worth squat without a supermajority. In that sense, the Japanese national budget is no different from laws. Think about that when you consider the need, and prospects, for the Kan administration, or any other administration for that matter, for a meaningful coalition or, more likely, fluid issue-oriented alliances.
* Budget-related bills are submitted before the non-budget-related bills, so they have a much better chance of being passed before the Diet session expires. The Cabinet Legislative Bureau has final say within the bureaucracy on determining the nature of any bill. The distinction is sometimes unclear, and bureaucrats strive mightily to draft their bills to hook them up to the budget in ways that will convince the CLB to concur.

** Preferential lending rates from public financial institutions for specific policy objectives is the example that first comes to mind. Also, most subsidies other than tax breaks.

*** Most of the tax breaks are put together in a single law that covers special tax measures (including surcharges), and are dealt with en masse in an omnibus amendment bill during the annual regular Diet session.

**** Think, equity holdings.

***** The special dispensation acts are also used to dig up “buried treasures.” The FY2010 act, in addition to the authorization for deficit bonds, authorizes the transfer of funds from the FOREX, FILP, and Food Stabilization special accounts to the general account.


Ross said...

Your argument could more precisely be stated: the lower house budget power is useless when the government has to borrow more than it is going to spend or lend on public works.

So if the budget were at or near balance the power would have teeth. But not now.

So, how does the Japanese government define "public works"?

Jun Okumura said...

Dunno, Ross. I’ll have to ask Masaharu Kondo at the Cabinet Legislation Bureau if it comes to that. But it certainly doesn’t include human resources expenditures, social security expenditures, defense procurement, transfers to local governments—and I just listed the first things that almost instantly came to mind. So there’s not a lot of room to play around with. And of course the media will be on the lookout for any shenanigans, since Hatoyama ruined the honeymoon in the political equivalent of the Narita rikon.

I’m working my way around the background for the money piece.

And your clarification could be more precisely stated:

Your argument could more precisely be stated: the lower house budget power is useless when the government [has to borrow more] [needs more money (don’t forget the special accounts)] than it is going to spend or lend on public works.

Have a nice weekend; I hope that my (exactly) 250 words work for you.