Fiscal Policy in Japan: Lessons for SA Research on Public Finance - PowerPoint PPT Presentation

Fiscal Policy in Japan: Lessons for SA Research on Public Finance Management and Urban Development Mechanisms Presented by: : M Ngobeni/ B Deka | 6 Sep 2016

Contents 1. Introduction 2. Budget process & rules 3. Structure of the budget • Big elephants 4. Key themes • Budget balance • Fiscal consolidation 5. Lessons 2

Introduction • 2 week visit in Japan • The visit to the Ministry of Finance – Presentation on the budget • Topic selection links with area of specialisation • Similarities and stark differences between the 2 countries • Aim is not to compare the 2 systems • Draw lessons and areas of possible improvements 3

Budgeting Processes • Budget authority – Japan's annual budget is adopted through a parliamentary/cabinet system. – Budget formulation authority resides in the Prime Minister's cabinet – The MoF compiles the budget using estimates from other ministries – Cabinet guides the priorities and budget prior to approval of the Diet – Budget undergoes intense deliberations in the bicameral (House of Representatives & House of Councillors) Diet – The HR is the lower than the HC and prevails over budget matters. The latter is dominated by opposition parties and approved “deficit -financing bonds”: delays in budget finalisation Source: (Mieko 2016) 4

Budgeting Processes • Fiscal year: April to March • MTEF cycle is in use Month Budget Cycle Approval of guidelines for budget requests by Cabinet Guidelines specifies the expenditure ceilings June to August Submissions of preliminary estimate documents by the various ministries are made by August of that year August to December Budget requests are made open to the public for scrutiny & competition for resources occurs. The process is transparent even between spending ministries. Cabinet submits the budget proposal to the Diet to allow for sufficient deliberation. The January HR should pass the budget 30 days before the start of the financial year • The budget is almost always approved without any substantial amendments. Source (Tanaka 2003) 5

Budget rules • The Public Finance Act(PFA) of 1947 – Balanced budget rule • Article 4: all expenditure of the state shall be financed by revenue other than public bonds or borrowing. • Circumvented through laws to issue special deficit-financing bonds • Social security spending forces deviation from this clause. • Other expenditures financed by bonds with the golden rule are listed in the budget. This is considered the exceptional clause in principle. – Golden rule • Article 4: public works, investment and loans can be financed by public bonds or borrowing within a specific amount approved by Parliament as an exception. • PFMA, 1999 does the same for SA Source (EPRS 2016) 6

Budget Structure • The budget consists of 4 accounts 2016/17 budget Japanese budget (Billion Yen) % of total with each submitted to the Diet by Revenue budget the Cabinet for deliberation: – The general account budget Tax revenues 57 604 60% (main budget) Other revenues 4 686 5% – Special account budget (e.g. Government bonds issues 34 432 36% national pension system) – Budgets for government-related Total revenues 96 722 100% agencues Expenditure budget – The Financial Investment and National debt Loan Plan (FILP) service 23 612 24% General  Long-term low interest investment expenditure 57 829 60% and loan account Allocation tax and  Supports SMMEs, construction of grants 15 281 16% welfare institutions & provision of scholarship loans Total expenditures 96 722 100% Sources (EPRS 2016) and (JPN Budget 2016) 7

Budget Structure • Revenues • Expenditures − Income taxes:32% of the budget − Social security: 33% (includes (PIT: 19% & CIT:13%) NHI) − Government bonds:35% (Special  Oldest population in the world deficit bonds: 30%)  35% of population is over 65 − Consumption tax:18%  Pension scheme = 10% of • GDP Observations − Capital debt redemption costs: − Impossible to finance social security 24%: Interest payments on without deficit financing bonds. debt:10% − Income taxes are not enough to finance social security. − Grant allocation:16% − Debt service costs erode the entire − Education:5% VAT Sources (JPN Budget 2016) and (World Bank undated)

Budget Structure: Comparison with SA 2015/16 2016/17 2017/18 2018/19 Percentage of total Revised Medium-term estimates MTE F R million estimate allocation Basic education 213 676 228 803 245 414 264 969 17.6% Health 159 377 168 393 183 629 198 556 13.1% Defence, public order and safety 171 522 181 519 192 444 203 644 13.7% Defence and state security 49 900 52 344 54 063 56 373 3.9% P olice services 82 648 87 508 94 095 100 225 6.7% Law courts and prisons 38 974 41 667 44 285 47 047 3.2% Post-school education and 64 158 68 715 74 715 80 493 5.3% training E conomic affairs 187 796 211 962 217 965 231 091 15.7% Industrial development and trade 29 550 31 844 31 938 35 314 2.4% E mployment, labour affairs and social 65 915 73 127 75 270 77 358 5.4% security funds E conomic infrastructure and netw ork 73 613 87 105 90 493 97 460 6.5% regulation Science, technology, innovation and 18 718 19 886 20 263 20 959 1.5% the environment Human settlements and municipal 178 233 182 631 199 821 216 215 14.2% infrastructure Agriculture, rural development and 25 249 26 417 27 744 29 147 2.0% land reform General public services 2 97 450 73 652 77 770 82 611 5.6% E xecutive and legislative organs 12 485 13 378 13 988 14 768 1.0% General public administration 67 802 41 597 44 701 46 491 3.2% and fiscal affairs Home affairs 7 247 7 391 7 052 8 935 0.6% E xternal affairs and foreign aid 9 916 11 286 12 029 12 417 0.8% Social protection 154 353 167 479 180 634 194 945 12.9% Allocated by function 1 251 815 1 309 571 1 400 135 1 501 671 100.0% Debt-service costs 129 111 147 720 161 927 178 556 – Contingency reserve 6 000 10 000 15 000 Consolidated expenditure 1 380 926 1 463 291 1 572 062 1 695 227 Source (2016 Budget Review) 9

Budget Structure: Comparison with SA 2015/16 2016/17 2017/18 2018/19 Percentage of total Revised Medium-term estimates MTEF R million estimate allocation Social protection expenditure 154 353 167 479 180 634 194 945 100.0% of which: Social grants 128 868 140 499 152 207 164 754 84.2% of which: Child support 47 459 51 951 56 287 60 981 31.2% Old age 53 274 58 927 64 656 70 833 35.8% Disability 19 298 20 418 21 447 22 522 11.9% Foster care 5 480 5 522 5 781 6 029 3.2% Care dependency 2 431 2 677 2 939 3 219 1.6% South African Social Security 6 643 6 909 7 416 7 876 4.1% Agency Provincial social development 16 632 17 718 18 567 20 124 10.4% 100.0% Total 154 353 167 479 180 634 194 945 Social grants as percentage of GDP 3.2% 3.2% 3.2% 3.2% Social grant beneficiary numbers by grant type (Thousands) 12 052 12 349 12 609 12 844 Child support Old age 1 3 182 3 300 3 419 3 542 1 096 1 086 1 078 1 072 Disability 456 461 466 471 Foster care Care dependency 142 148 153 158 Source (2016 Budget Review) 10 10

Budget balance (% of GDP) 2.0% 0.0% -2.0% -4.0% -6.0% -8.0% Economic crisis and erratic growth rates -10.0% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Japan -3.1% -2.6% -3.1% -8.9% -8.3% -8.6% -8.2% -7.9% -7.1% -6.0% SA 0.6% 1.0% -1.0% -6.3% -4.7% -4.7% -5.0% -4.4% -4.3% -4.2% Sources: Trade Economics website and National Treasury’s Budget reviews 11 11

Fiscal consolidation • Budget deficits resulted in fiscal consolidation policies in both countries • Previously these countries experienced surpluses • Current situation means expenditure ceilings • Measures of fiscal consolidation – Japan’s efforts to restore soundness of public finance  Fiscal Structural Reform Act of 1997: include MTEF fiscal targets.  Reduce public debt-to-GDP ratio  Reach a primary surplus by 2020  Social security reforms  Economic revitalisation programme to stimulate growth – SA captures the rules for fiscal consolidation in budget guidelines.  Budget reductions amount to 2% (R32 bn) of the budget in the 2016 MTEF  Targets G&S, CoE  Address overall procurement inefficiencies = R20 billion each year  Stringent criteria for debt issuance Sources (Tanaka 2003), (SA 2016 Budget) and (JPN Budget 2016) 12 12

Lessons • Similarities in fiscal policy are seen in the fact that both budgets are pro-poor • Parliamentary ratification of budget guidelines • Opening the budget process for public scrutiny • Transparent budget process between spending priorities • Enshrining fiscal consolidation in legislation • Adopting a set of KPIs for fiscal consolidation • Personnel costs are also very low in Japan as a proportion of the entire budget − The seniority system: pays the youth lower amounts and the elderly higher amounts contributes to this aspect. • Trade unionism: close to non-existent in Japan and employees are not allowed to strike, this is a very big contrast to SA. 13 13