Public Finance and Budgets

(1) Idiosyncrasies of Public-Finance Activities in Japan

To learn about the mechanism of public finance, it is best to refer to documenta-tion dedicated to the matter. Nevertheless, in this book, I wish to reflect a little on the fundamentals.

The public finance activities of the Japanese government can be categorized into general public finance, and fiscal investment and loans. General public finance is made up of the General Accounts, the special accounts, and the government agencies (Yumoto, 2008: 17–30). We will first turn our attention to the budget of the General Account. Figure 5-1 shows the trends of the percentage share of the budgetary allocation of each of the expenditures on a time series using a unit scale of five-year intervals. Ideally, the budget should be processed by the govern-ment in a single account for all revenue and expenditure (the single annual budget principle). However, for specific projects it has become possible to establish special accounts, such as in cases when carrying out operations where specific funds are held or when there are specific revenues and it is better to distinguish from general revenues and expenditure by allocating specific expenditure in line with the objec-tives. As of February 2013, the government held 18 kinds of special accounts.

The general account budget of the fiscal year 2012, including revisions, was of a size that exceeded 100.5 trillion yen. In the general account expenditure, payment

Figure 5-1 Trend of Expense Categories in General Accounting Budgets

Source: Ministry of Finance 0

0.1 0.2 0.3 0.4 0.5 0.6 0.7

FY 1955 FY 1960 FY 1965 FY 1970 FY 1975 FY 1980 FY 1985 FY 1990 FY 1995 FY 2000 FY 2005 FY 2010

Social security related expenditure

Education related and science and technology promotion expenditure Expenditure for servicing government bonds

Public works related expenditures Other

of principle interest on government bonds, social insurance related expenditure, and distribution of local allocation tax made up 70% of the total. Note that for general account expenditure such as social security related expenditure and pub-lic works related expenditure, rather than paying it directly, the money is often transferred to a special account first and then paid from there. Looking at Figure 5-1 while taking such details into account, there is a gradually increasing trend for social security-related expenditure, the growth of which is particularly large after entering the 2000s. Moreover, looking at the long-term picture, there is a gradual increase of expenditure for servicing government bonds. There is a trend of gradual decrease for education-related and science and technology promotion expenditure. Moreover, public works-related expenditure also appears to have been decreasing in recent years. However, in reality, when looking at the gov-ernment’s public finance activities, placing attention on only the general public finance could invite a misleading conclusion.

Including revisions, the budget for special accounts in the fiscal year 2012 was approximately 394 trillion yen, which is actually much larger than the general public finance. However, as mentioned above, this includes items that are recorded in both accounts, such as transfers from the general account to special accounts (more than 50 trillion yen). Therefore, simply aggregating the amounts of all of the accounts is not a reflection of the scale of the government’s public finance activities. Note that these special accounts contain reserve funds of large amounts, and at the time of the closing of accounts for the fiscal year 2011, the size of these amounts was 167 trillion yen. This is what is referred to as the “buried treasure.”

Of this, 133 trillion yen is a slush fund for future pensions of the people, and 21 trillion yen is in foreign currency denominated funds. As this buried treasure is fundamentally allocated for future risks, judgment of its size depends on the sense of values of the advocate. However, the management of special accounts is funda-mentally entrusted to the respective governing agency, and a large portion of these special accounts are criticized as hotbeds for the inefficient use of funds in projects involving incorporated administrative agencies and public interest corporations.

However, if this buried treasure is used, it can only be used once, and once gone, there will be nothing that remains. Therefore, it cannot become a means for fun-damentally resolving Japan’s deficit financing (Yumoto, 2008: 178–179). First and foremost, a substantial cause of Japan’s deficit financing relates to the increase in ordinary costs from the steep increases in social security expenditure and the aging population.

Moreover, an area to pay particular attention to when looking at Japan’s public finance is fiscal investment and loans. The sector that has been often portrayed as an emblem of excesses in Japan’s public finance is public works. Public works-related expenditure is the expenditure target of construction bonds as stated in the general budget provisions. Fiscal investment and loans refer to the government’s accommodation of funds for government-affiliated institutions and local self-gov-erning bodies and the implementation of the public investment of these funds as financial resources. Hence, this is not entirely synonymous with public works.

In reality, however, fiscal investment and loans has effectively been categorized

into public works’ categories of buildings and construction. Looking at the gen-eral account only, from the budget of the fiscal year 1974, social security-related expenditure began to rise above public works-related expenditure; but, in fact, since the situation of the 1970s, the fiscal investment and loans have been increas-ing at a pace clearly exceedincreas-ing the public works-related expenditure and the social security-related expenditure of the general account (Ide, 2013: 42–44).

The difference between fiscal investment and loans and general public finance is that while general public finance is a world of subtraction and addition of actual funds, fiscal investment and loans is a world of lending and borrowing—in other words, a world of financial transactions (Yumoto, 2008: 22–23). In the initial budget for the fiscal of 2012, the size of fiscal investment and loans exceeded 17 trillion yen. The effect of such fiscal investment and loans on Japan’s overall public finance policies will be revisited later.

As one can understand from the discussion thus far, problems with public finance are extremely difficult for the layman to understand due to the complexity of its actual content. While, on the one hand, this is unavoidable due to the scale of the country, on the other hand, the existence of both the general account and spe-cial accounts does make it easy to conduct some accounting gymnastics between the two accounts. Not only that, but the revised budgets, which are carried out when there is a high level of intrinsic urgency, end up being allocated every year as if they had been planned all along, which also results in the difficult-to-understand nature of these matters and the accounting gymnastics that occur (Tanaka, 2013:

Chapter 4). The complexity of the system causes different interpretations by advo-cates and confusion among laymen. Democracy fundamentally reflects the will of the people, but it greatly depends on the people being informed by accurate information. However, when the opinions among the experts present views that are completely opposed to one another, it causes problems for the public finance, taxation, and social security systems. This state of confusion can surely be linked to the lack of trust in the government that was mentioned earlier in Chapter 4.

(2) Mechanism of Budget Compilation

The compilation of budgets in Japan does not take the form of cramming in the content after deciding the apportionment for each field. Budgetary adjustments inside each ministry and agency accumulate as the budget advances to each divi-sion and bureau. Each ministry and agency then negotiates with the MOF con-cerning this accumulation of adjustment items (whereby each ministry and agency repeatedly engages in back-and-forth discussion with the MOF a significant num-ber of times).

During the high economic growth period up until 1970, on account of the growth in expenditure, it was the Meeting of Budget Examiners in the MOF that finally performed the adjustments of the budgetary allocation. It can therefore be said that the authority of the MOF was very strong. From the latter half of the 1970s, however, the government issued deficit-covering government bonds.

Moreover, by establishing a limit on the preliminary budget request (i.e., a ceiling) to constrain expenditure, the budgetary allocation limit was effectively passed on

to each ministry and agency. It thus became possible to see the existing level before the preliminary budget request. For this reason, before the preliminary budget request to the MOF, the refining of the budget inside each ministry and agency rose in importance, while the significance of the requested budget given to the MOF and the examiners’ assessment became comparatively weaker. Although the budgetary adjustment by this method of accumulation brought about a sense of stability, the situation also made it difficult to instigate much change to the public finance budget overall (Iio, 2007: 56–59).

The ceiling that prescribes the preliminary budget request limit (or criteria) is treated strictly, which is also the case all over the world. The strictness of this ceil-ing, however, can be viewed as the cause of the large public finance deficit. When the ceiling was first adopted, it was limited to the initial budget of the general account. Then, since the 1990s, throughout the special accounts, the size has con-tinued to increase and the limit for the revised budget has also been expanded. In other words, because the ceiling in the general account was too strict, it caused a backlash within the LDP, and there was a strengthening of pressures, led by influ-ential members of the Diet, to increase the items and their amounts as exemptions to the ceiling. The MOF negotiated partial concessions with the politicians and enacted special limits to allay the discontent, while he continued to maintain the ceiling as it was. However, in effect, the applicable scope of the ceiling was limited only to the general account, and it did not serve the role of cancelling the public finance deficit, which comprised the total budget (Amou, 2013).²

Now if we look at the specific procedures of this budget compilation, first, beginning in mid-April, all the governing divisions of each ministry and agency set about creating a draft with the chief of their general affairs unit in charge, which is examined by the general affairs division inside the respective agency. Then, budget negotiations are conducted inside each agency between the general affairs division and each of the divisions in charge, and a budget proposal for inside the agency is decided on. Next, negotiations begin between the general affairs division of each agency and the division-budget division of the ministry; and by repeating this pro-cess, a budget proposal for the ministry gets prepared. Using the ministry budget proposal that has been prepared in this way, the ministry then enters into negotia-tion with the MOF (Omori, 2006: 146–147).

Although, from the start, the ultimate objective of the MOF has been to control the state’s public finance, this does not entail control of the fine budgetary details of each ministry and agency but rather control of the size of the overall budget.

The objective is also to adhere to the establishment and maintenance of the ceiling.

Since 1961, the MOF has decided on the budget growth rate by comparing it with the time of compilation of the previous fiscal year, and each ministry and agency has submitted a preliminary budget request that is in line with this. On the other hand, once the budget is created, the MOF is disinterested in its control and the executed budget is often different from the planned budget (Kato, 1997: 62–65).

Among these, the Ministry of Education has traditionally contained clearly sec-tionalized bureau units, and each of these has the particular characteristic of pos-sessing numerous associated institutions directly linked to the daily lives of the

people (such as the education committees of elementary, junior high, and senior high schools in the case of the Elementary and Secondary Education Bureau).

According to Masahito Ogawa, as it is not possible to execute policy without tak-ing into consideration the voices of society, such as schools, the policies have been formed with importance given to a bottom-up type of consensus.³

Specifically, according to Ogawa (2010), the public finance for education directly after the war was influenced by the bureaucrats and the minister of the Ministry of Home Affairs before the war. The fact that the Ministry of Home Affairs controlled Japan’s domestic portion of public finance and the pre-war Ministry of Education established institutions for local education with public finance was the reason that the influence of the Ministry of Home Affairs still remained. The local public order (i.e., police) was also the jurisdiction of the Home Ministry. Accordingly, the education policy at that time was to take con-trol of education from the perspective of public order and efforts were put into controlling the local area. On this point, the Minister of Home Affairs and other members of the education policy tribe observed and attacked the socialists and the Japan Teachers’ Union, which was a significant ideological move in support of the ruling party. From the 1960s, however, even from inside the LDP, the education policy was debated as “policy,” and it became a politicized issue. It was from this that the modern image of the bunkyozoku, the education policy tribe, emerged. At that time, The Education and Science and Technology Division was established beneath the General Council, and while power was strengthened there, power was correspondingly weakened in the Ministry of Education government offices. One thing that is often pointed out is that Diet members were able to collect votes based on subsidies for agriculture and forestry, construction (land and transport), commerce and industry (trade and industry → economy and industry); thus, they wielded power in the LDP and enjoyed popularity. However, the education policy tribe had difficulty getting access to these subsidies and votes. Conversely, because there was no relationship to votes, the tribe included many Diet members with a strong ideological streak, characterized by a will to execute education policy to realize their own political beliefs and stance.

With globalization and the collapse of the Cold War, however, the relative posi-tion of educaposi-tion policy changed dramatically from the 1990s, and the character of the MEXT underwent inevitable and dramatic change after this reorganization of the Ministry of Education and the other ministries and agencies. In particular, with the introduction of the single-seat constituency system, the political voice of politicians became relatively strong, and this strengthened the cabinet’s functions.

The reason that this led to MEXT having a stronger influence is because political power is necessary. In other words, when there is no political power, it is not pos-sible to extend the budget.

It is written above that the political voice of politicians was strengthened with the single-seat constituency system. This refers not to the individual politician but to the appeal of policies as a political party. Rather than an individual politi-cian running a campaign on the strengths of a specific policy, it is necessary to appeal to a wide spectrum of policies. It is for this reason that the aforementioned

tribe of Diet members lose influence. Sometimes, the voices of these tribe Diet members are criticized as being “vested interests” and “forces of resistance;” and, paradoxically, they sometimes use this to their own advantage during elections.

A typical example of this was the Koizumi administration’s reform of the postal system, which is one example of a cabinet’s strong authority effectively working.

Accompanying this, the organization inside MEXT also placed importance on adjustment by the Lifelong Learning Policy Bureau (Policy Division) and the Minister’s Secretariat Policy Division that dissects horizontally through the min-istry, and there was a strengthening trend for final decisions to be made further up the hierarchy (Minister’s Secretariat and Minister) (Ogawa, 2010).

(3) Composition of Education-Related and Science and Technology Promotion Expenditure and Child Learning Costs

Figure 5-2 shows a breakdown of expenditure categories in “Education-related and science and technology promotion expenditure” in the general account bud-get (including revisions). As can be seen, the share of expenditure of the National Treasury’s compulsory education contribution is significantly decreasing. At pres-ent, it has been cut by 30%. In its place, the expenditure that has increased the most is that of education promotion grants. The reason for this is that up until the

budget of the fiscal year of 2003, transfers to the national schools’ special account were classified separately. Moreover, as the national schools’ expenditure came to be understood by the same mechanism as grants to private schools due to the incorporation of the national schools, it came to be included in the education pro-motion grants. This is why the expenditure for education propro-motion grants rises sharply from 2005. In addition to these grants to schools, the expenditure required to distribute educational materials such as textbooks is also included in this expen-diture. The share of education facility expenditure shows a gradually decreasing trend; and in its place, science and technology promotional expenditure shows an increasing trend. Scholarship loan project costs have proceeded at a consistently low level.

If we comprehensively look back at the results of the “Survey on Local Educational Expenditures” conducted by the MEXT, the declining population was reflected in each of the educational fields. In recent years, the percentage of distribution to total expenditure has proceeded steadily at around 27% for ele-mentary school expenditure and at around 15% for junior high school. In the fiscal year of 2010, expenditure for schools for special needs’ education, showing a gradually increasing trend, was 4%, while senior high school expenditure, show-ing a decreasshow-ing trend, was in the lower 12%. Higher education expenditure has shown an increasing trend, and in recent years it has been around 15%.

In March 2010, the DPJ Government established the Act on Free Tuition Fees at Public High Schools and launched the High School Tuition Support Fund Program. This budget proposal is reflected in the fiscal year of 2010. As Figure 5-2 shows a trend using a time series of five-year intervals, it is somewhat difficult to discern, but compared with the fiscal year of 2009, there was a growth in expen-diture exceeding 300 billion yen—the highest in the past 30 years (approximately 5.9% of the MEXT budget). The expenditure for the Free Tuition Fees at Public High Schools and the High School Tuition Support Fund Program is included in this expenditure for education promotion grants.

However, as already mentioned many times, the public finance education expenditure itself is low in Japan by international comparison. Looking at ele-mentary and junior high school education alone, the international ranking is not that low, but the overwhelming share of the expenditure here is for teacher sala-ries. In other words, the expenditure spent on items other than teacher salaries (educational material costs, school equipment costs, and building maintenance costs, etc.) is only a little more than 10%, whereas the OECD average is about 20–30% (Ishii, 2012). Therefore, while education is compulsory in Japan, the actual situation is not one in which people do not have to pay for their children’s education. The schools operate by collecting funds and donations from the par-ents and guardians for various accounts such as PTA costs and classroom activity fees. For example, according to the “Child Learning Cost Survey” (in the fiscal year 2012), conducted biannually by MEXT, even for public schools that do not impose tuition fees, the annual costs were found to be 55,197 yen for elemen-tary school, 131,534 yen for junior high school, and 230,837 yen for senior high school (for all “school education costs”). Figure 5-3 shows the trend of the total Figure 5-2 Trend of Expenditure Categories in Education Related and Science and

Technology Promotion Expenditure of the General Account Budget

Source: the Ministry of Finance 0

0.1 0.2 0.3 0.4 0.5 0.6 0.7

FY 1955 FY 1960 FY 1965 FY 1970 FY 1975 FY 1980 FY 1985 FY 1990 FY 1995 FY 2000 FY 2005 FY 2010

National Treasury’s compulsory deducation contribution National schools operating expenditure

Education facilities expenditure Scholarship loan project expenditure

Science and technology promotion expenditure Education promotion grant expenditure

amount of learning costs (including extracurricular education) (unit: yen) based on this “Child Learning Cost Survey.” Apart from kindergartens, private schools cost the most at the elementary school level and less as the level of schools becomes higher. Private elementary and junior high schools exceeded 1 million yen, and private senior high school costs were close to 1 million yen (there having also been a period in the past when they exceeded 1 million yen). The sudden decrease in the cost in the fiscal year 2010 corresponded with the introduction of the Free Tuition Fees at Public High Schools and High School Tuition Support Fund Program.

The cost for private schools also decreased in the fiscal year 2010, but as costs rose noticeably in the fiscal year 2012, the impact of the Free Tuition Fees at Public High Schools and the High School Tuition Support Fund Program is more dif-ficult to observe than is the case for public schools.

Figure 5-4 shows the percentage share of total learning costs for “curricular education costs” and “extracurricular education costs.” The costs in “curricular education costs” include lesson fees, school event costs, PTA costs and student association costs, textbooks, other books and equipment, excursions, uniform, and commuting costs, among others. The costs in “extracurricular education costs”

include costs and monthly gratuities for private coaching colleges, home tutors, equipment and books for study at home, and arts, sporting, and other experien-tial activities. The dark line indicates curricular education costs and the faded line extracurricular education costs. The continuous line signifies public schools and

Figure 5-3 Trend of Total Child Learning Costs

Source: MEXT “Child Learning Cost Survey”

Public kindergarten Private kindergarten Public elementary school Private elementary school Public junior high school Private junior high school

Public senior high school (full-time) Private senior high school (full-time) 0

200,000 400,000 600,000 800,000 1,000,000 1,200,000 1,400,000 1,600,000

FY 1994 FY 1994 FY 1998 FY 2000 FY 2002 FY 2004 FY 2006 FY 2008 FY 2010 FY 2012

Elementary school

Public school curricular education costs Public school extracurricular education costs Private school curricular education costs Private school extracurricular education costs

FY 1994 FY 1996 FY 1998 FY 2000 FY 2002 FY 2004 FY 2006 FY 2008 FY 2010 FY 2012 0

0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9

Figure 5-4 Trend of Percentage Share between Curricular and Extracurricular Education (a)

Source: MEXT “Child Learning Cost Survey”

0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9

Kindergarten

Public school curricular education costs Public school extracurricular education costs Private school curricular education costs Private school extracurricular education costs

FY 1994 FY 1996 FY 1998 FY 2000 FY 2002 FY 2004 FY 2006 FY 2008 FY 2010 FY 2012

Figure 5-4 (b)

Senior high school (full-time)

Public school curricular education costs Public school extracurricular education costs Private school curricular education costs Private school extracurricular education costs

FY 1994 FY 1996 FY 1998 FY 2000 FY 2002 FY 2004 FY 2006 FY 2008 FY 2010 FY 2012 0

0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9

Junior high school

Public school curricular education costs Public school extracurricular education costs Private school curricular education costs Private school extracurricular education costs

FY 1994 FY 1996 FY 1998 FY 2000 FY 2002 FY 2004 FY 2006 FY 2008 FY 2010 FY 2012 0

0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9

Figure 5-4 (c)

Figure 5-4 (d)

the dotted line private schools.

The comparative difference for elementary schools and junior high schools proceeds stably, but there is a large change in the comparative difference for kin-dergartens and senior high schools. With regard to kinkin-dergartens, there is not a large change for the total learning costs, but the percentage share of curricular education costs is creeping higher, overall. Looking at this breakdown,⁴ there are no obvious trends that can be observed concerning particular increases for any of the cost categories. However, the public finance burden on pre-primary educa-tion, which tends to be overlooked as an education expense problem, is also at a low level among the OECD countries. In the first place, not all children attend pre-elementary education (in recent years, the percentage has proceeded at around 60%). Therefore, even though there is a certain level of choice regarding whether or not to enter kindergarten, according to this survey, the fees required will be a little more than 70 thousand yen for public kindergartens and a little less than 240 thousand yen for private kindergartens. As parents with kindergarten-age children are in younger adulthood, some parents might find this a heavy burden.

In social stratification research, it is often pointed out that one’s social stra-tum of origin affects education achievements and school performance. In order to weaken that effect, early-stage measures are considered to be important. For example, in the United States, the Head Start Program, which was initiated by the Democratic Johnson (Lyndon B. Johnson) administration based on a “War on Poverty” campaign, was truly a program that addressed this problem. However, in Japan, such public support for the early stage of education and child rearing is extremely weak, and with respect to the point that the cost of school educa-tion itself includes numerous costs, measures of some kind probably need to be considered.

On the other hand, although change has been significant for senior high school, the percentage of curricular education costs in particular has lowered due to the Free Tuition Fees at Public High Schools and High School Tuition Support Fund Program. The introduction of this program has effectively reduced household expenditure by at least 100 thousand yen, which is definitely not a small impact.

One would think that if the burden of tuition fees were simply reduced, this por-tion would shift to a different educapor-tion costs (such as extracurricular educapor-tion, etc.). In particular, one might expect this to be observable in data for private schools,⁵ where one assumes there to be many cases in which tuition fees are high, and the pupils who attend them are hence likely to be in the high-income class.

Just from looking at the data alone, however, this trend cannot be observed. As can be described with reference to Figure 5-3, the educational cost burden of families overall has been alleviated, and fundamentally, a large increasing trend can no lon-ger be observed in recent years.

In the case of the compulsory education stage of elementary school and junior high school, the percentage share of curricular education costs used for public schools is becoming lower. To express this the other way around, the fact that the tuition fees for private elementary and junior high schools are that high is the cause of this result.