Thoughts on Rebuilding from the Great Tohoku Earthquake (1)
Raising Rebuilding Funds from “Buried Treasure”
Hidetaka Yoneyama, Senior Research Fellow
August 19, 2011 (Friday)
At the end of March, soon after the Great Tohoku Earthquake, those willing at Fujitsu Research Institute’s Economic Research Center published an eight-part, many-faceted series entitled “The Lessons of the Great Tohoku Earthquake and Its Effects on Japan’s Economy” with the goal of analyzing the effects of the earthquake and proposing emergency policy aimed at rebuilding. Since then, while the rebuilding efforts continue to proceed gradually in the damaged area, the “grand design” which focuses on Japan’s future remains locked in the deliberation stage, and not only have discussions failed to come to a consensus, they actually seem to be scattering in all directions. As information about damages and companies’ efforts begins to be gathered little by little, our thinking continues to evolve, and at present we have decided to present again our collected opinions in “Thoughts on Rebuilding from the Great Tohoku Earthquake.” We hope that this series will be a useful resource in the ongoing, multifaceted discussions towards rebuilding.
The analyses and proposals presented herein are the responsibility of each author. Of course, the authors’ opinions may change as the situation changes.
(1) Raising Rebuilding Funds from “Buried Treasure”
1. Scenario of raising taxes to secure rebuilding funds
The 1st supplementary budget of 2011, which includes ¥4 trillion for recovery from the Great Tohoku Earthquake, is expected to pass, and the next step is the drawing up of a 2nd supplementary budget which will include serious funding for rebuilding. In addition to economic policy discretionary reserves (¥800 billion), funding for the 1st supplementary budget was also supplied from: rethinking the raising of childcare benefits (¥200 billion); diverting funds to maintain a 50% burden on the national coffers for basic pensions (¥2.5 trillion); and the rethinking of certain discount highway services and freezing the plan to make highways free (¥400 billion). The government was therefore able to avoid issuing more national bonds, but the 2nd supplementary budget will likely require funds on the order of ¥10 trillion, and securing such an amount may present problems.
At present, a predominant proposal is to issue “rebuilding bonds” in order to raise the necessary funds for rebuilding, and then to raise a core tax (income, corporate, or sales) for a limited time in order to redeem the bonds. Among those who propose raising sales tax temporarily, there are also proponents of a two-step sales tax raise, in which it would initially be raised 3%, of which 1% (approximately ¥2.5 trillion) would be set aside to ease the burden of basic pensions on the national coffers and the rest of which would be used as funds to redeem rebuilding bonds. Once we had a better idea of where the rebuilding stood, sales tax would not be returned to its original 5%, but rather would be raised above 10% and the resulting revenue used as funds for social security.
While raising sales tax has been necessary for financial reform for quite some time, the government has not been able to get it off the ground. By using the impetus of applying the funds as rebuilding measures, this proposal will attempt to take off in one go. This is just the sort of plan that the finance authority, which earnestly wishes for the raising of the sales tax, would concoct. In fact, from the very beginning, when the basic pension’s funds (¥2.5 trillion, which is exactly 1% of sales tax) were diverted as funds for the 1st supplementary budget, it was clear that the finance authority’s intent was to have things work out such that only sales tax would be able to supplement the lacking funds. The idea of using the disaster as an opportunity to raise sales tax like a thief in the night is disreputable. Before the earthquake, there was a strong opinion that Japan had to thoroughly eliminate the wasteful spending in its financial policy.
Conversely, there are those who say that instead of sales tax, income tax or corporate tax should be raised temporarily. The reasons given for this are that even if the amount secured by raising sales tax were returned at a later date, for a short time victims of the earthquake would also have to shoulder the burden, and that sales tax is regressive, i.e. it is particularly onerous for low-income earners. Conversely, income tax and corporate tax would be borne by those individuals and corporations with the means to do so, and giving victims of the earthquake exemption would be technically easy. A precedent can be seen in the reunification of Germany, when costs were met by adding a tax on top of income tax and corporate tax. The proposal of raising consumer tax is above all for the purpose of preserving the funds for social security, which is of the utmost importance. However, the problem with the alternative is that raising income tax, even by an extra 10%, would yield only ¥1 billion per year, and corporate tax only several ¥100 million to ¥1 billion.
Opinions on which core tax to raise do not come any closer to consensus than this, but raising taxes itself is relatively easily accepted according to public opinion, even if the reasoning smells fishy. According to a recent public opinion poll, 65.5% believe that raising taxes is unavoidable for securing rebuilding funds (Sankei Shimbun, April 26). However, there is great peril in proceeding headlong with tax raises without even trying to make cutbacks in expenditures. Once consumer tax is raised, it most likely won’t be lowered again, and it is not hard to imagine things going just as the finance authority intended. While raising taxes may be necessary, expenditure cutbacks must be made first.
2．Use surplus funds from special accounts
When it comes to contriving funding through expenditure cutbacks, the “buried treasure” that is special accounts has garnered much attention in the past. Special accounts are flow-based, and every year there is a surplus of funds; this surplus is applied to the reserve fund, i.e. special accounts stock, as well as being put into the general accounts, with any leftover funds being forwarded into the next year’s budget. There have been problems with special accounts for a long time. There is much room for exploring the raison d’être of a given special account, the contents of its expenses, and whether the amount in the reserve fund is appropriate. However, until now all debates regarding special accounts have ended at an impasse, and even though at times the reserve fund has been broken up in order to procure funds, drastic cutbacks have never been undertaken.
Dredging up every past discussion of special accounts’ raisons d’êtres would not be productive and so I will not do so here. What I want to point out here is that every year funds are left over from the special accounts and the majority of these funds are tossed into the next year’s budget. When the next year ends, however, almost the same amount of funds is left over, with the result that these funds simply propagate through the budget from year to year. In other words, these funds, which are in excess of ¥20 trillion, lie stagnant year after year. That is not to say that the entire amount is sitting idle. Within the amount that is forwarded to the next year, approximately half is actually for payments from the previous year which had to be delayed due to issues of payment date. Only approximately ¥10 trillion is actually idle.
Going into specific numbers: settling the special accounts of 2008 resulted in a surplus of ¥28.5 trillion (7.3% of the special account annual revenue), of which ¥4.2 trillion went to reserve funds, ¥2.4 trillion to the general account, and ¥21.3 trillion was forwarded to the next year’s budget. Of that ¥21.3 trillion, ¥12.8 trillion was used for the previous year’s expenditures carry-over and debts, leaving ¥8.5 trillion lying around. When looking at the special account settling of 2009, we see a ¥29.8 trillion surplus (7.8% of special account annual revenue), of which ¥0.6 trillion went to reserve funds, ¥2.7 trillion to the general account, and ¥26.4 trillion to the next year’s budget, of which ¥14.1 was used for 2008’s expenditures and debts, leaving ¥12.3 trillion sitting idle. Every year the special accounts generate a surplus of around ¥10 trillion which sits idle.
Of course, having some idle funds in the budget every year is fine. But when it is on the order of ¥10 trillion in the special accounts, we can start thinking of putting it towards rebuilding. If we streamlined the fund management of the special accounts in such a way that there would be no problems even without the idle funds before we broke them off, that portion could be applied to rebuilding efforts, albeit as a one-off.
If immediately breaking up the special accounts would put too much burden on them, then we could for example divide the breakup into two ¥5 trillion installments and use these as funds to redeem rebuilding bonds. By using the surplus funds in the special accounts, we could at least secure the rebuilding funds called for in the 2nd supplementary budget without raising core taxes.
This is just one example, but there are many cases of wasteful financial policy in Japan. If we rush towards raising taxes without first fixing these problems, we will lose the chance to fix them at all. Japan’s fiscal management should recapture the idea of using crisis as an opportunity not to raise taxes, but to streamline, as the majority of Japanese companies do.
