Apr.03.2006

Japanese Bankers Association

Study Group on the Financial System Publishes Report on Desirable Governmental Budgets and Road Map to Budgetary Reconstruction (only in Japanese)

On April 3, the second subgroup (subgroup leader: Professor Toshihiro Ihori, University of Tokyo) of the Study Group on the Financial System compiled and published the report, Desirable Governmental Budgets and the Road Map to Budgetary Reconstruction, based on their fiscal 2005 studies.

The main points of the report are as follows.

- To reduce the ratio of the huge public debt to GDP and enable governments, both national and regional, to run sustainable budgetary operations for years to come, the primary balance needs a surplus of more than 3% of the GDP.
- The first step to improving the budgetary balance is reducing expenditures as far as possible. The remaining deficits may be covered by raising taxes a minimum amount.
- As for reducing expenditures, public enterprise-related expenditures need to be reduced to the same level as other countries (need to be halved in terms of the ratio to GDP). Education-related expenditures may be reduced reflecting demographic changes. Other expenditures including social security-related expenses need to be reduced as much as possible.
- There are two means for increasing revenues. The first is to raise the consumption tax, which would ensure stable revenues and be horizontally impartial. Another is to raise the progressiveness and rates of income tax, which would restore the built-in stabilizer function of taxes. However, both of these approaches have their merits and demerits, making it a policy matter.
- The budgetary reconstruction process debate must include coordination with the monetary policy and reforms of regional governmental budgets.
- In aiming to realize a sound budget, it is desirable to take a steady year-by-year approach that proactively uses the economic recovery so as not to hamper the macro-economy.