Fiscal Policy in Japan - Issues and Future Directions - Introduction 1.Social security benefits have been increasing every year due to the aging population. 2.With these situations, the public finance in Japan is the worst compared with other countries. 3. The enhancement and sustainability of the social security system and the fiscal consolidation should be achieved simultaneously. All revenues from the consumption tax hike All revenues shall be used from for the social consumption security. tax shall be used for social security. excluding the ongoing local consumption tax revenue; 1% excluding the ongoing local consumption tax revenue; 1% July 2015 Ministry of Finance
The Structure of Total Expenditures Regarding the total expenditures in general account budget, social security expenditures and national debt service increase every year, while the ratios of other expenditures (public works, education and science, national defense, etc.) decrease every year. 1. Social Security: expenditures for pension, medical care, and long-term care, etc., which increase by one trillion yen level every year due to the aging population. 2. National Debt Service: expenditures which consist of redemption and interest payments, and which increase with increasing government bonds outstanding. 3. Local Allocation Tax Grants: expenditures which are distributed to the local governments so that all of them can provide the minimum administrative services. The central government adjusts and distributes uneven tax revenues among the local governments. These three expenditures account for 70% of total expenditures in general account budget. FY2015 Budget 2 National Debt Service 23.5 trillion 24.3% National Defense 5.0 trillion 5.2% Redemption of the National Debt 13.3 trillion Others 9.5 trillion 9.9% Education & Science 5.4 trillion 5.6% Interest Payments 10.1 trillion General Account Total Expenditures 96.3 trillion Public Works 6.0 trillion 6.2% 1 Social Security 31.5 trillion 32.7% Local Allocation Tax Grants, etc. 15.5 trillion 16.1% 3 1
The Structure of Total Revenues The total revenues in general account budget consist of income tax, corporate tax, consumption tax, other tax revenues, non-tax revenues, and government bond issues. Currently, only 60% of the total expenditures are financed by tax revenues and non-tax revenues. As a result, about 40% depends on the government bond issues (debts) which will be the burden for future generations. The consumption tax rate was raised from 5% to 8% in April 2014. All the revenues from the consumption tax shall be used for the financial resources for social security. excluding the ongoing local consumption tax revenue (1% of the consumption tax rate) FY2015 Budget Government Bond Issues 36.9 trillion 38.3% Special Deficit Financing Bonds 30.9 trillion 32.0% General Account Total Revenues 96.3 trillion Income Tax 16.4 trillion 17.1% Tax and Stamp Revenues 54.5 trillion 56.6% Corporate Tax 11.0 trillion 11.4% Gasoline Tax Liquor Tax Inheritance Tax Tobacco Tax Customs Duties Petroleum and Coal Tax Motor Vehicle Tonnage Tax Other Taxes Stamp Revenues 2.5 1.3 1.8 0.9 1.1 0.6 0.4 0.4 1.0 Construction Bonds 6.0 trillion 6.2% Other Revenues 5.0 trillion 5.1% trillion yen Consumption Tax Others 17.1 trillion 10.0 trillion 17.8% 10.4% Financial resources for social security 2
Consumption Tax Revenues for the Social Security All the revenues from the consumption tax shall be used for the financial resources of social security in the central and local governments. excluding the ongoing local consumption tax revenue (1% of the consumption tax rate) The Primary Balance (PB) is an indicator that shows to what extent the expenditures for policy measures (public works, education and science, national defense, etc.) are covered by tax revenues and non-tax revenues. The primary deficit is financed by public debts which will be the burden for future generations. FY2015 Budget Government Bond Issues 36.9 trillion Fiscal Balance -23.6 trillion yen Redemption of the National Debt 13.3 trillion Interest Payments 10.1 trillion National Debt Service 23.5 trillion Non-tax Revenues 5.0 trillion Primary Balance -13.4 trillion yen Public Works, National Defense, Education & Science, etc. 25.6 trillion Tax Revenues 54.5 trillion Corporate Tax 11.0 trillion Income Tax 16.4 trillion Other Tax Revenues 10.0 trillion Consumption Tax 17.1 trillion Financial resources for social security in local governments 3.8 trillion -14.5 trillion yen 13.3 trillion Other social security expenses 4.4 trillion Local Allocation Tax Grants, etc. 15.5 trillion Four social security expenses 27.5 trillion Primary Expenses 72.9 trillion Total Revenues ( 96.3 trillion) Total expenditures ( 96.3 trillion) Excluding the redemption of pension-related special deficit-financing bonds ( 0.3 trillion) 3
Trends in Expenditures and Revenues, and the Government Bond Issues While total expenditures have been consistently increasing, total revenues (tax revenues) have been growing at a sluggish pace. The gap is financed by the government bond issues (Special Deficit- Financing Bond and Construction Bond). trillion yen 120 100 (FY2015) 96.3 80 60 Total Expenditures (FY1990) 69.3 60.1 54.5 40 20 Tax Revenues 6.0 30.9 0 6.3 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 FY Special Deficit- Construction Financing Bond Issues Bond Issues 4
Change in the Fiscal Structure Comparing the FY2015 budget with FY1990, the expenditures have increased by 30 trillion yen. The breakdown of the expenditures shows that social security expenditures have increased by 20 trillion yen (about 3 times) and national debt service has increased by 10 trillion yen due to the increase in government bonds outstanding. The breakdown of the revenues shows that although tax revenues have not increased, the government bond issues have increased by about 30 trillion yen. This means that the increase in social security benefits due to the aging population has been financed not only by social insurance contributions but also by debts which will be the burden for future generations. FY1990 Revenues 66.2 trillion Expendi -tures Public Works, National Defense, Education & Science, etc. 25.1 trillion Tax Revenues and Non-tax Revenues 60.6 trillion Local Allocation Tax Grants, etc. 15.3 trillion Social Security 11.6 trillion National Debt Service 14.3 trillion Government Bond Issues 5.6 trillion + 30.1 trillion + 0.9 trillion + 19.9 trillion + 9.2 trillion Expendi -tures 96.3 trillion Revenues Public Works, National Defense, Education & Science, etc. 25.8 trillion Local Allocation Tax Grants, etc. 15.5 trillion Tax Revenues and Non-tax Revenues 59.5 trillion Social Security 31.5 trillion National Debt Service 23.5 trillion Government Bond Issues 36.9 trillion FY2015 5
Change in the Structure of Total Expenditures The share of national debt service and social security expenditures has been consistently increasing. On the other hand, the share of other expenditures such as public works, national defense, and education and science has been consistently decreasing. % 100 1.5 3.5 90 18.8 21.6 12.7 20.7 24.0 24.3 National Debt Service 80 16.0 11.1 70 14.1 23.0 17.7 16.1 Local Allocation Tax Grants, etc. 60 18.8 50 16.6 19.7 40 32.7 Social Security 68.6 30 60.8 52.5 20 10 39.8 38.5 26.8 Other Expenditures (Public Works, National Defense, Education & Science, etc.) 0 60 70 80 90 00 15 FY 6
International Comparison of Fiscal Scales Compared with other countries, the scale of social security expenditures is placed at the middle level but the scale of tax revenue is placed at the lowest level. In addition, the scale of expenditures not relating to social security is placed at the lowest level. General Government Expenditures General Government Social Security not Relating to Social Security Expenditures (as a percentage of GDP) (as a percentage of GDP) 0 20 40 32.8 31.2 30.3 28.0 26.8 26.8 26.7 26.6 25.6 25.4 25.3 24.8 24.0 24.0 23.8 23.0 23.0 23.0 22.1 20.4 20.3 18.5 17.7 17.7 17.2 16.4 16.0 14.5 7.9 % 1Denmark 2France 3Finland 4Austria 5Greece 6Italy 7Belgium 8Sweden 9Germany 10Slovenia 11Japan 12Norway 13United Kingdom 14Portugal 15Netherlands 16Ireland 17Luxembourg 18Spain 19Hungary 20Czech Republic 21Poland 22Iceland 23Estonia 24Slovak Republic 25United States 26Turkey 27Israel 28Switzerland 29Korea 0 20 40 23.0 22.0 21.9 21.7 21.7 21.7 21.6 21.2 20.9 20.5 19.9 19.7 19.3 19.3 19.2 19.1 18.5 18.5 18.4 18.4 18.3 18.1 18.1 18.0 17.6 16.6 16.5 15.5 14.8 % 1Hungary 2Iceland 3Belgium 4Israel 5Sweden 6Slovenia 7Denmark 8Finland 9Netherlands 10France 11Poland 12Portugal 13Estonia 14Czech Republic 15United States 16Spain 17Slovak Republic 18Luxembourg 19Austria 20United Kingdom 21Ireland 22Greece 23Norway 24Korea 25Turkey 26Italy 27Switzerland 28Germany 29Japan General Government Tax Revenue (as a percentage of GDP) 0 20 40 60 46.7 34.3 33.0 31.9 31.8 31.1 29.9 29.5 28.7 27.8 27.4 27.0 26.6 26.5 26.0 24.3 23.7 23.7 22.7 22.7 22.1 21.6 21.6 20.9 20.4 20.1 20.1 19.9 19.8 19.5 18.5 16.9 16.8 16.5 % 1Denmark 2Sweden 3Norway 4Iceland 5New Zealand 6Finland 7Belgium 8Italy 9United Kingdom 10Austria 11France 12Israel 13Luxembourg 14Australia 15Canada 16Hungary 17Netherlands 18Portugal 19Ireland 20Germany 21Slovenia 22Switzerland 23Greece 24Poland 25Estonia 26Spain 27Turkey 28Chile 29Korea 30Czech Republic 31United States 32Mexico 33Japan 34Slovak Republic CY2011 7
International Comparison of Fiscal Balance and Gross Debt While many countries have improved their fiscal balances, Japan continues to run significant fiscal deficits. As a result, the fiscal situation is the worst among other countries and the ratio of general government gross debt to GDP exceeds 200%. percentage of GDP 4 General Government Fiscal Balance 0-4 -8 Germany Italy Greece United States Japan -12-16 90 92 94 96 98 00 02 04 06 08 10 12 14 CY percentage of GDP 250 200 150 100 50 General Government Gross Debt Japan? Greece Italy United States Germany 0 90 92 94 96 98 00 02 04 06 08 10 12 14 CY 8
Aging Population and Increase in Social Security Benefits With the rapidly progressing population aging, social security benefits (pension, medical care, long-term care, etc.) have increased significantly. On the other hand, the revenues of social insurance contributions have not increased accordingly. Although the social security system in Japan is based on social insurance system, the gap between social security benefits and revenues of social insurance contributions has been subsidized by the central and local governments. The burden of the central government increases by one trillion yen level every year and most of its financial resources depends on public debts. This is the main reason of worsening fiscal deficit. trillion yen 100 80 60 47 trillion 40 20 Financial Resources of Social Security Benefits 16 trillion 40 trillion Social Security Benefits Burden of Central and Local Governments Social Insurance Contributions depending mainly on public debts 109 trillion 43 trillion 61 trillion 0 90 92 94 96 98 00 02 04 06 08 10 12 Change in Population Aged 65 and over, and Aged 20 64 80 75 70 76 Aged 20 64 (left scale) 74 31 FY million people 40 35 30 65 25 60 55 15 Aged 65 and over (right scale) 20 15 50 90 95 00 05 10 12 9 10 FY
Prospect at the Social Security Benefits The population aging will progress further and all of the first baby boomer generations will be 75 years old and over in the early 2020s. The establishment of the sustainable social security system is urgently needed because the medical care and long-term care benefits per capita increase sharply with the increase in age. Increase in the Number of Aged 75 and Over and Medical Care and Long-term Care Benefits Per Capita Number and ratio to total population Medical care (2011) Long-term care (2012) 2012 2025-13.0 million people Aged 64 and under: 96.7 million 84.1 million Medical care benefits per capita Public aid per capita Aged 64 and under : 175 thousand 27 thousand Long-term care benefits per capita Certification rate Public aid per capita Aged 65~74-1.0 million people 15.6 million 14.8 million (12.2%) (12.3%) 553 thousand 85 thousand 50 thousand (4.4%) 14 thousand Aged 75 and over +7.0 million people 15.2 million 21.8 million (11.9%) (18.1%) 461 thousand 892 thousand 326 thousand (31.3%) 131 thousand Others 7.4 trillion Support for child and childcare 4.8 trillion Long-term Care 8.4 trillion Medical Care 35.1 trillion Prospect of Social Security Benefits 109.5 trillion Total Benefits 148.9 trillion 1.36 times Others 9.0 trillion Support for child and childcare 5.6 trillion Long-term Care Long-term Care 19.8 trillion 2.34 times Medical Care 1.54 times Medical Care 54.0 trillion Pension 53.8 trillion Pension 1.12 times Pension 60.4 trillion GDP 479.6 trillion FY2012 GDP 1.27 times GDP 610.6 trillion FY2025 10
The Balance between Benefits and Contributions While Japan s population aging is progressing so rapidly compared with other countries, tax and social security contributions ratio in Japan is lower than other countries. In order to maintain the public finance and the social security system in Japan, the whole people need to discuss about the relationship between contributions and the increase in the social security benefits accompanied by population aging. % 40 30 20 Population Aging Rate (2010) 23.0 Japan Italy Germany Greece France Sweden U.S. 10 0 1950 1970 1990 2010 2030 2050 Tax and Social Security Contributions Ratio 0 10 20 30 40 50 60 % of national income France Italy Sweden Germany Greece Japan United States 39 44 49 30 33 23 24 7 Tax 26 66 19 63 7 56 22 52 19 52 17 41 31 CY2012 Social Insurance Contribution 11
Comprehensive Reform of Social Security and Tax The government is currently implementing the comprehensive reform of social security and taxes for achieving fiscal consolidation and enhancement and sustainability of social security system simultaneously. All the revenues from consumption tax increase shall be used to enhance and sustain social security system. Therefore, the burdens for future generations as public debts of the central and local governments will be reduced. Use of (national) consumption tax before the Reform Three social security expenses for the elderly (basic pension, medical care for the elderly, long-term care) Enhancement of the Social Security System after the Reform Four social security expenses (child and childcare, medical and long-term cares, basic pension) Enhancement of the social security system: 2.8 trillion yen Child and childcare: 0.7 trillion yen Medical and long-term cares:1.5 trillion yen Basic pension: 0.6 trillion yen 社会保障の充実 For enhancing social security system For financing the increase in social security expenditures 14.0 trillion 消費税率引上げに伴う社会保障 due to the price increase reflecting 4 経費の consumption tax increase 増 2.8 後代への負担のつけ回しの軽減 For ensuring the sustainability of social security system (= reducing public debt) 0.8 基礎年金国庫負担割合 For supporting basic pension 1/2 system (50% is funded by the government) 8.2 trillion 1.35 7.3 5.0 trillion 0.35 0.5 3.4 0.2 1.3 Enhancement 1% Sustainability 4% 2.95 3.0 3.2 FY2014 FY2015 FY2018 Consumption tax rate 8% (1st year) 8% 10% 12
Economic and Fiscal Projections for Mediumto Long-term Analysis The government has already set up the following fiscal consolidation targets; 1. To halve the primary deficit of the central and local governments to GDP ratio by FY2015 from the ratio in FY2010, 2. To achieve a primary surplus by FY2020, and 3. Thereafter, seeking to steadily reduce the public debt to GDP ratio According to the Economic and Fiscal Projections for Medium- to Long-term Analysis published by the Cabinet Office in July 2015, the FY2020 primary surplus target cannot be achieved even with the GDP growth of 3% in nominal and 2% in real. Primary Balance of the Central and Local Governments to GDP ratio % of GDP 0-1 Primary Surplus Target - 11.9 trillion yen - 6.2 trillion yen - 1.0% -2-3 -4-5 - 3.0% - 4.3% - 2.2% The Target of Halving Primary Deficit: - 3.3% -6-5.7% -7-6.6% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Economic Revival Case : The growth rate is 3% in nominal and 2% in real terms Baseline Case : The growth rate is mid 1% in nominal and slightly under 1% in real terms The Fiscal Consolidation Target FY 13
Clear Trajectory toward Fiscal Consolidation Therefore, the government formulated the fiscal consolidation plan called The Plan to Advance Economic and Fiscal Revitalization which shows the clear trajectory toward achieving the fiscal consolidation target and expenditure reform measures. The Plan to Advance Economic and Fiscal Revitalization (excerpt) (Cabinet Decision on June 30 th, 2015) Across all expenditure items, the Abe Cabinet will further strengthen the measures which have been implemented over the past three years and proceed with a thorough review without any exceptions. Local governments will also proceed with thorough reviews in accordance with the central government s efforts. The government will strictly undertake full-fledged reforms from the budget for FY2016 which is the first year of the Plan. Designating the first three years of the Plan (FY2016-18) as the intensive reform period, the government will proceed with Integrated Economic and Fiscal Reforms intensively. Such efforts will be reflected in the annual budget formation process, all the related plans, basic policies, and bills. At the midpoint of the Plan (FY2018), the government will assess the progress towards achieving the target. The government will use benchmarks of reform efforts during the intensive reform period such as the ratio of the primary deficit to GDP to around -1% for FY2018. Regarding general expenditures of the central government *, the government is making efforts for expenditure reform in line with the past achievements of the Abe Cabinet, without presupposing an increase except in social security expenditure due to population aging, while taking into account a decline in total population and changes in wages and prices. Regarding social security expenditures, the government carries out the enhancement of social security with the increase in consumption tax revenues, while considering the effects of population aging and the trend of increase in social security expenditure under the Abe Cabinet. It should be noted that the government will seek to control the year on year expenditure flexibly, not evenly. Local government expenditures shall be also controlled in line with the efforts by the central government. Note: Regarding the benchmark of general expenditures of the central government, the trend of the past three years under the Abe Cabinet, indicating that an essential increase of approx. 1.6 trillion yen, shall be continued until FY 2018 with consideration of the future economic situation and price movements, etc. * General expenditures = Total expenditures (in central government s general account) (National debt service + Local allocation tax grants, etc.) 14