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.

But What Are You Going to Do about the Ten Trillion Yen Hole, Mr. Ozawa?…oh… Well, Mr. Aso?…oh…

According to Ichiro Ozawa’s opening “statement”, the DPJ price tag for its new program in the works now comes in at 20.5 trillion per year in its all-options, fourth and final-year version. I assume that this is a pretty honest reckoning for now, give or take a few hundred billion, although the long-run effects of some of the items, such as the elimination of the gasoline tax surcharge (2.6 trillion) and the medical care makeover (2 trillion), are hard to control and therefore difficult to predict. The numbers do not add up to 20.5 trillion because some big ticket items are missing, such as the DPJ promise to halve corporate tax rates for small and medium enterprises. Where all this money is going to come from is vaguer, although they do conveniently add up to 20.5 trillion. According to the Yomiuri, it consists of:

4.8 trillion: Coming down on special tax breaks (business) and income tax deductions (individuals)
0.7 trillion: Selling off government property
6.5 trillion: Taking net revenue and reserve cash from the Fiscal Investment Special Account (FILP-SA) and the Foreign Exchange Special Account (FE-SA)
4.3 trillion: Cutting subsidies
1.8 trillion: Reforming government procurement (and otherwise reducing government waste?)
1.3 trillion: Reducing payments to national public servants

Some comments while I wait the announcement of the entire package:

On the expenditure side, the 2.6 trillion gas tax reduction and the 1.5 trillion loss in highway toll revenues add up to a 4.1 trillion gift to private car owners and businesses. Do the Socialists and, yes, Communist really want to support that? On the revenue side, the DPJ’s global warming countermeasures tax (DPJ 2007 Manifest 4.1, first paragraph) should counterbalance the gas tax reduction, but it’s missing from the revenue estimate. Does the LDP want to mention that? But that’s small change compared to:

The DPJ is going to dig into the two cash-cow special accounts for 6.5 trillion, or almost 1/3 of the 20.5 trillion bill. According to MOF, in FY2006, the FILP-SA and Foreign Exchange-SA had surpluses of 2.5 trillion and 2.1 trillion respectively)*. This is in the same ballpark as the 4 trillion that I dimly recall Yoichi Takahashi—ex-MOF official, Koizumi-reformist brain-trust member, and one of the pioneer treasure hunters—saying could be safely taken out of the two special accounts on an annual basis. Give the benefit of the doubt to the DPJ and assume that the government can count on a combined four and a half trillion surplus each year; that still leaves a 2 trillion shortfall to be made up by digging into reserves. Kudos to the DPJ for owning up to that, but how long can it do that on an annual basis before these most fungible of “buried treasures” are gone? Actually, if the fiscal conditions expected at the start of FY2008 continues unchanged, a business-as-usual scenario is likely to eliminate these “buried treasures” altogether by FY2011 (three years into what would be the DPJ four-year-plan) unless annual government borrowing is increased by 10 trillion.

Talk about an elephant in the room… I think I need a drink.

ADD: I just realized that the need for more debt issues depends on the maturity schedule of the existing ones. I can rest a little easier. A drink (or two) sure helped. Still, the matter needs to be looked into over the next four years (and beyond). I’ll try to remember to look for the relevant data when I have the time.

* See this post. The relevant MOF links are in the footnote at the bottom. The arithmetic behind the vanishing “buried treasures” can be easily read off the post.

“No Budget Talk, We Are Offended,” Says DPJ

This is in the Asahi, so nobody can be accused of setting up the DPJ. Let me translate for you:

The informal meeting of the directors of the Upper House Budget Committee was held on the 10th, where the ruling parties sought to hold hearings on the FY 2008 budget bill. However, the DPJ was angered because the government with regard to the BOJ appointments introduced its plan to promote Deputy Governor Toshirō Mutō, so it was determined that they would confer further.

The top DPJ director Mitsuru Sakurai explained that it did not consent to hearing under orders from the party leadership. He told the reporters, “Someone that we could not accept was nominated, and was nominated with little time left. (The Diet) is abnormal as a whole and we interpreted our orders to mean that we should not even agree to holding hearings on the budget.” Budget Committee Chairman Yoshitada Kōnoike criticized the DPJ, saying, “It is inexcusable to put the BOJ appointments and hearings on the budget bill on the same level and use them as tools for the political game.”

But, the DPJ is willing to hold hearings on the BOJ appointments, it seems.

I am not sure that Mr. Sakurai realizes how irresponsible this exchange must be making the DPJ look in the eyes of independent voters (while undermining his own personal authority), but I am pretty sure that the “leadership” is a leadership of one, the enigmatic, volatile Ichirō Ozawa. You remember how his long-suffering deputy Yukio Hatoyama has had to harden his position on Mr. Mutō and kept embroidering his reasons for rejecting him as Mr. Ozawa indulges his hopeless obsession for an early snap election.

Even if the increasing DPJ intransigence turns out to be entirely the product of the usual escalation and hardening of positions as a negotiating deadline approaches, I no longer see much room for a DPJ climb-down, and the LDP isn’t helping. The LDP game plan seem to be: be as conciliatory as possible on the gasoline taxes and road construction expenditures, and hold fast on the BOJ appointments. It looks like it’s working so far.