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Japan scholar warns against free welfare programs

Posted March. 05, 2011 11:14,   

한국어

Japan’s national finances are a mess.

The Japanese Finance Ministry said the country owed 919.15 trillion yen (11.16 trillion U.S. dollars) at the end of last year, accounting for 192 percent of Japan’s GDP of 479.22 trillion yen (5.82 trillion dollars) and more than 217 percent of the standard set by the International Monetary Fund.

Credit rating agencies have lowered Japan’s sovereign rating given its unstable national finances. So how has Japan, whose economy was once called the global model to emulate, fallen into such a grave condition?

Hiromitsu Ishi, a Japanese scholar in finance and president of the Open University of Japan, blames “cowardly politicians” who used populist policies to win votes in elections. He urged voters to make a cool-headed judgment in casting their votes.

On free welfare programs such as free healthcare, childcare and school meals and the halving of college tuition being pushed for by Korea’s main opposition Democratic Party, he warned that Korea will face big problems and repeat the same failure Japan had should these programs be implemented.

The following is excerpts from The Dong-A Ilbo`s interview with Ishi.

Dong-A: Many people are worried about Japan’s fiscal soundness

Ishi: Japan is the lone advanced economy whose national debt is almost double its GDP. If compared to a household, this means the household borrows 470,000 yen (5,710 dollars) to finance its spending of one million yen (12,149 dollars). (The Japanese government’s general account last year was 92 trillion yen, or 1.11 trillion dollars, but tax revenues were 37 trillion yen, or 449.52 billion dollars. To fill the gap, it issued government bonds worth 44 trillion yen, or 534.56 billion dollars.)

The Japanese economy had grown an average 10-15 percent per annum until the early 1970s. At the time, both politicians and the people believed that such rapid economic growth would continue. In 1972, healthcare for the elderly became free and people called 1973 "the first year of welfare" as the government significantly raised pension payments that year. Two oil shocks in 1973 and 1979, however, brought down economic growth to the 5-percent level. Since then, Japan has faced the structural problem of increasing fiscal spending and declining tax revenues.

Dong-A: Calls for fiscal soundness have long been around.

Ishi: There has been much discussion but no action. Japan in 1979 began discussion on the introduction of the consumption (value-added) tax to finance a welfare system, but the tax was adopted in 1989. The consumption tax was raised from 3 percent to 5 percent as recently as 1997. Talk of raising the rate to 10 percent has been around over the past 14 years.

Ishi also said Japanese politicians have long considered the hike in the consumption tax as political taboo. Japanese administrations that pushed to raise the tax lost both elections and power.

“Whenever elections come, politicians brand the consumption tax as evil to win votes and present tax-related populist policies. Cowardly and negligent politicians are the main culprit of Japan’s lost vitality,” he said.

Dong-A: Japan’s welfare system is apparently hindering fiscal soundness.

Ishi: Massive public projects increased the fiscal deficit until the 1990s, and in the 2000s, revenue shortages and welfare expenditures led to a ballooning of the deficit. Japan has no choice but to choose between a cut in welfare benefits and tax hikes. Politicians are well aware of this but cannot think about doing so because the Dankai generation, who will soon become pension beneficiaries, accounts for the largest segment of voters.

The Dankai generation refers to 7 million Japanese baby boomers born between 1947 and 1949. They will begin receiving their pension from next year, posing a huge fiscal burden to the Japanese government. Pension payments will go up from 50.3 trillion yen (611.1 billion dollars) in 2009 to 59 trillion won in 2015 (716.8 billion dollars) and to as much as 65 trillion won (789.69 billion dollars) in 2025.

Dong-A: Korea’s national debt is also growing rapidly.

Ishi: Korea’s national debt-to-GDP ratio was 33.8 percent in 2009, a stable amount compared to Japan’s. But Korea must realize that the figure, which was 28.7 percent in 2005, has inched up every year. If national debt begins growing, it can easily spiral out of control. In 1977, Japan’s debt was similar to Korea’s at 32 percent but doubled to 60 percent in 1983 and soared to 100 percent in 1997. It took just 13 years for the figure to exceed 200 percent.

Dong-A: In Korea, a free welfare package is a hotly debated issue.

Ishi: (Suddenly standing up and sitting down again) Look at Japan. Since it took power in 2009, the Democratic Party of Japan has offered various welfare policies such as a childcare subsidy of 13,000 yen (158 dollars) per month for every child under middle school age and no-toll highways. The party estimated that 16.8 trillion yen (204.1 billion dollars) was needed to finance these policies and believed that that amount could be raised without tax increases by cutting tax breaks for companies and restructuring the national budget. The party, however, is now saying fiscal deterioration cannot be dealt with without raising the consumption tax. The increase in welfare will be shouldered by future generations. There is no free welfare. The people need insight to discern populist welfare policies.



changkim@donga.com