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

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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

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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

• ther 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

• pposition parties and approved “deficit-financing

bonds”: delays in budget finalisation

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Source: (Mieko 2016)

Budgeting Processes

• Fiscal year: April to March
• MTEF cycle is in use
• The budget is almost always approved without any substantial amendments.

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Month Budget Cycle Approval of guidelines for budget requests by Cabinet Guidelines specifies the expenditure ceilings Submissions of preliminary estimate documents by the various ministries are made by August of that year June to August August to December Budget requests are made open to the public for scrutiny & competition for resources

• ccurs. The process is transparent even between spending ministries.

Cabinet submits the budget proposal to the Diet to allow for sufficient deliberation. The HR should pass the budget 30 days before the start of the financial year January

Source (Tanaka 2003)

Budget rules

• The Public Finance Act(PFA) of 1947

– Balanced budget rule

• Article 4: all expenditure of the state shall be financed by revenue
• ther 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

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Source (EPRS 2016)

Budget Structure

• The budget consists of 4 accounts

with each submitted to the Diet by the Cabinet for deliberation: – The general account budget (main budget) – Special account budget (e.g. national pension system) – Budgets for government-related agencues – The Financial Investment and Loan Plan (FILP)

 Long-term low interest investment and loan account  Supports SMMEs, construction of welfare institutions & provision of scholarship loans

Japanese budget 2016/17 budget (Billion Yen) % of total Revenue budget Tax revenues 57 604 60% Other revenues 4 686 5% Government bonds issues 34 432 36% Total revenues 96 722 100% Expenditure budget National debt service 23 612 24% General expenditure 57 829 60% Allocation tax and grants 15 281 16% Total expenditures 96 722 100%

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Sources (EPRS 2016) and (JPN Budget 2016)

Budget Structure

• Revenues

− Income taxes:32% of the budget (PIT: 19% & CIT:13%) − Government bonds:35% (Special deficit bonds: 30%) − Consumption tax:18%

• Observations

− Impossible to finance social security without deficit financing bonds. − Income taxes are not enough to finance social security. − Debt service costs erode the entire VAT

• Expenditures

− Social security: 33% (includes NHI)

 Oldest population in the world  35% of population is over 65  Pension scheme = 10% of GDP

− Capital debt redemption costs: 24%: Interest payments on debt:10% − Grant allocation:16% − Education:5%

Sources (JPN Budget 2016) and (World Bank undated)

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Budget Structure: Comparison with SA

Source (2016 Budget Review)

2015/16 2016/17 2017/18 2018/19 R million Revised estimate Medium-term estimates 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

• lice 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 training 64 158 68 715 74 715 80 493 5.3% 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 security funds 65 915 73 127 75 270 77 358 5.4% E conomic infrastructure and netw ork regulation 73 613 87 105 90 493 97 460 6.5% Science, technology, innovation and the environment 18 718 19 886 20 263 20 959 1.5% Human settlements and municipal infrastructure 178 233 182 631 199 821 216 215 14.2% Agriculture, rural development and land reform 25 249 26 417 27 744 29 147 2.0% 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 and fiscal affairs 67 802 41 597 44 701 46 491 3.2% 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 Percentage

• f total

MTE F allocation

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Budget Structure: Comparison with SA

Source (2016 Budget Review)

2015/16 2016/17 2017/18 2018/19 R million Revised estimate Medium-term estimates Social protection expenditure 154 353 167 479 180 634 194 945 100.0%

• f which:

Social grants 128 868 140 499 152 207 164 754 84.2%

• f 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 Agency 6 643 6 909 7 416 7 876 4.1% Provincial social development 16 632 17 718 18 567 20 124 10.4% Total 154 353 167 479 180 634 194 945 100.0% Social grants as percentage of GDP 3.2% 3.2% 3.2% 3.2% Social grant beneficiary numbers by grant type (Thousands) Child support 12 052 12 349 12 609 12 844 Old age1 3 182 3 300 3 419 3 542 Disability 1 096 1 086 1 078 1 072 Foster care 456 461 466 471 Care dependency 142 148 153 158 Percentage

• f total

MTEF allocation

Budget balance (% of GDP)

11 11 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%
• 10.0%
• 8.0%
• 6.0%
• 4.0%
• 2.0%

0.0% 2.0%

Sources: Trade Economics website and National Treasury’s Budget reviews

Economic crisis and erratic growth rates

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

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Sources (Tanaka 2003), (SA 2016 Budget) and (JPN Budget 2016)

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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.

国会の議決・ 決算検査報告等 決算 予算執行調査 本省調査 活用

Plan Do Check Action Plan

政策企画立案 成果目標設定

政策実施

行政事業ﾚﾋﾞｭｰ ・ 政策評価

予算要求 政策企画立案 成果目標設定 各 府 省

予 算 査 定

反映 反映 反映 反映

予 算

納 税 者 の 声 活用

予 算

財務局調査

予算執行 ご意見箱

予算編成

予 算 執 行

財 政 当 局

Lessons on budget execution and efficiency

Each Ministry

Planning Policy, Setting Targeted Result Policy Implementation Administrative Business Review/Policy Evaluation

Reflection Reflection Reflection Reflection

Budget Request

Budget Compilation

Planning Policy, Setting Targeted Result

Financial Administration Authority

Budget Budget Execution

Tax Payes' Opinions [Budget Execution Opinion Box]

Utilization

Utilization

Budget Execution Investigation [Investigation by the Ministry of Finance Investigation by the Local Financial Bureaus]

Budget Diet Resolution/Accoun t Settlement Audit Report, etc.

Budget Budget Revision

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Main Body, etc. Main Purpose Main Viewpoint/Focus Target Budget Execution Investigation (2002- ) Investigation by the financial administrative authority that dealt in budget compilation ・Rationalization of execution ・To improve budget efficiency Budget necessity, effectiveness, efficiency Affairs/projects related to national budget Policy Evaluation (2002- ) ・Self evaluation by each ministry (Objectivity check by the Ministry of Internal Affairs and Communications) ・Evaluation by the Ministry of Internal Affairs and Communications to secure unification/generalization of policy related to multiple ministries To appropriately reflect policy in each ministry Policy necessity, efficiency, effectiveness, etc. Policy Administrative Business Review (2010- *) Each ministry (Administrative business review promotion team takes initiative to inspect business including open process) To understand the actual conditions of how the budget is spent and to where the budget was paid Efficiency of tax input, appropriateness in the aspect of effect Project (Administrative expenses and labor cost, etc. of each ministry are excluded.) Audit (1947- ) Audit, etc. by the third organization Board of Audit (Independent from the Cabinet) ・Supervision of accounting ・Confirmation of account settlement Accuracy, compliance, economy, efficiency, effectiveness, etc. of budget execution, etc. Accounting of national government, corporation invested by the country, local governments in which the national government granted subsidy Administrative Evaluation/Supervis ion (2001- ) Ministry of Internal Affairs and Communications To improve administration Compliance, appropriateness, efficiency, etc. of administrative work National affairs (Including government-affiliated company, authorized corporation (government invested a half of capital) which supports government work, work entrusted by the government, , government’s support work, and legally prescribed transaction)

(*) As for the administrative business review, starting fiscal 2013, review is carried out based on the argument Related to improvement/verification for improvement by the Administrative Reform Promotion Council .

Lessons on budget execution and efficiency

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○ To utilize financial funds effectively and efficiently, it is important to enhance the Check and the Action functions among the budget PDCA cycle (Plan (in budget compilation), Do (budget execution), Check (evaluation/verification), and Action (incorporating in budget)) and appropriately provide feed back for the budget. ○ In fiscal 2002, the Ministry of Finance started “budget execution investigation” which is to investigate whether or not the budget is efficiently and effectively executed by the responsible division of the Budget Bureau and Local Budget Bureaus, etc Based on the investigation results, budget execution is improved ,and the results are reflected in the budget for the following fiscal year.

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[Changes of Investigation Results] Intent/Purpose of Budget Execution Investigation

Investigated Fiscal Year 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 Number of Investigatio ns 46 53 59 57 68 62 63 73 100 65 75 75 75 56 52 Reflected amount in budget for the following fiscal year (100 million yen) 189 492 275 260 288 （Expen diture） 307 324 380 398 109 172 （Expen diture） 263 379 （Expen diture） 273 （Reven ue） 35 （Reven ue) （Reven ue） 835

Thank you

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