Fiscal Deficit and Fiscal Reform in Japan


September 13, 2016

Asia Pacific Bulletin

Number 351 | September 13, 2016
ANALYSIS

Fiscal Deficit and Fiscal Reform in Japan

by Taro Ohno

Over the past few decades, Japan has experienced a number of changes in its social and economic circumstances as its population has been aging, its birth rate has been falling, and its economic growth rate has been declining. These changes all affect central government finances: they encourage increased expenditures (especially with regard to social insurance benefits) and decrease tax revenues, thereby increasing the fiscal deficit.

Image result for Shintaro Abe

The key turning point for central government finance came around 1990 when the economic bubble burst, and since that time Japan has been grappling with the issue of fiscal reform. The first attempt to deal with the fiscal deficit was a set of fiscal reforms introduced in 1997, the goal of which was to reduce the deficit by 2003. However, this effort proved ineffective because of the domestic financial crisis that started in 1997. The second attempt came in 2006, when the government set a policy target that sought to shift the primary budget balance to a surplus by 2011. However, this target was deferred in 2008 as a result of the recession. The most recent attempt was the setting of a new policy target in 2010 to eliminate the deficit and create a surplus by 2020. Currently, the Abe cabinet is continuing to pursue that target. It raised the consumption tax rate to 8 percent in 2014 and will raise it to 10 percent in 2019 to achieve this goal. However, these reforms alone are insufficient.

The major contributor to the current negative fiscal situation is the increasing cost of social insurance, and given the country’s aging population, that trend will continue. The current fiscal reform will not be able to achieve its target by relying only on restraining the costs of social insurance, and so a further tax hike is unavoidable.

What kind of tax policy, then, would be most effective? In Japan, current fiscal policy over emphasizes inter-generational redistribution, which places a heavy burden on the younger generation to fund the benefits of social insurance for the elderly generation. In addition, the burden on the younger generation is already heavy due to pension insurance premiums. Therefore, because an income tax has the disadvantage of the burden falling predominantly on those who are younger, an income tax hike is not a feasible approach. What is desired is that both young and old alike bear the burden. A consumption tax has the advantage that the burden falls on all age groups, making it a more feasible approach. However, it also poses a problem. Namely, the consumption tax burden on lower-income households is heavier than that for higher-income households on a point-in-time basis, as the ratio of tax burden to income is disproportionate. A consumption tax is “regressive,” meaning that some measures for low-income households would be necessary.

A lower consumption tax burden on higher-income households exists because of their high savings rate. As a household’s ratio of savings to income increases, its ratio of consumption to income decreases. This in turn lowers the ratio of consumption tax burden to income. However, a household will spend down its savings in the future, and thus will eventually bear the consumption tax burden on that spending. In other words, savings only has the effect of changing the timing of consumption; it does not relieve the tax burden entirely. Therefore, it is also necessary to evaluate the tax burden on a lifetime basis. Based on the author’s estimates (Ohno et al. 2014), the consumption tax burden of higher-income households is heavier than that for lower-income households. This implies that the consumption tax is in fact “progressive.” This would imply that any measures for low-income households might be adequate if applied only to the younger age brackets.

The current policy debate in Japan emphasizes the results on a point-in-time basis. This leads to the conclusion that some measures need to be taken to protect low-income households. Several such measures exist as options. First is a reduced consumption tax rate for necessities, such as food. Second is a benefit given only to low-income households — for example cash benefits or an earned income tax credit. In September 2015, Japan’s Ministry of Finance proposed a plan for low-income households that included a combination of the reduced tax rate on food and a tax refund. Each individual’s consumption information would be recorded through a unified electronic card called the “My Number Card,” which is similar to a social security card in the United States. Low-income households could apply for a tax refund equal to the amount of the tax cut for food expenditures at the end of the fiscal year. The public, however, reacted negatively and criticized the plan for the complexity of the system and voiced concerns about the security of the identity card. The public prefers a reduced rate for the consumption tax on food rather than the plan proposed by the Ministry of Finance because it is a simpler system and free from worry about the security of personal information in the unified electronic card. As a result, the government decided to raise the general consumption tax rate to 10 percent while at the same time adopting a reduced tax rate for food. However, the reduced tax rate for food is not an optimally effective policy because higher-income households are benefiting as well.

“Given the current situation in Japan, where a further tax hike is unavoidable, a consumption tax hike is a better option than an income tax hike.”

Barring any sudden drastic changes in the country’s birth rate or immigration policy, Japan will continue to face daunting fiscal challenges in the years ahead, and thus finding the most effective and equitable fiscal policy should be a top priority for the Japanese government. We can conclude that a further consumption tax hike is desirable. Given the current situation in Japan, where a further tax hike is unavoidable, a consumption tax hike is a better option than an income tax hike. However, the policy debates in Japan today seem to emphasize the results only on a point-in-time basis. In designing the optimal policy, it is important to evaluate the current tax system not only on a point-in-time basis but also on a lifetime basis. Finally, the reduced consumption tax rate for food needs to be reconsidered. While the public prefers the reduced tax rate, this policy is less effective in terms of being a measure for lower-income households.

About the Author

Taro Ohno is an Associate Professor in the Faculty of Economics and Law at Shinshu University, Japan. He can be reached at taro_ohno@shinshu-u.ac.jp.

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Malaysian Prime Minister reacts to BREXIT Decision


New York

June 24, 2016

Malaysian Prime Minister reacts to BREXIT Decision

by Najib Razak

http://www.freemalaysiatoday.com

UK voters have spoken. As democrats, we must respect the result. We wish our British friends well in the new future they have chosen.

The step the UK has taken is historic and unprecedented. The future cannot be predicted, although a period of volatility in financial markets is to be expected as the ramifications of the result are understood and as the UK’s exit is negotiated.

We will monitor developments closely and remain vigilant to any emerging economic risks. However, we do not expect a major impact on the Malaysian economy.

With our sound fundamentals, diversified economic structure and ample liquidity in our financial markets, Malaysia is well positioned to face any volatility. I am confident that we will be able to weather this period of uncertainty. The government will also continue to strengthen the economy and further our fiscal reforms.–Prime Minister Najib Razak

With our sound fundamentals, diversified economic structure and ample liquidity in our financial markets, Malaysia is well positioned to face any volatility. I am confident that we will be able to weather this period of uncertainty. The government will also continue to strengthen the economy and further our fiscal reforms.

 We regard the UK as an important partner in all areas, including trade, investment, defence, education and tourism.For example, trade between us has been growing, with British companies such as Rolls Royce, Dyson and BAE Systems increasing their footprint in Malaysia, and Malaysian companies driving the redevelopment of one of London’s greatest landmarks, Battersea Power Station.

But our economic exposure to the UK is limited, as it is not among Malaysia’s top 10 trading partners and only accounts for about 1% of our total trade. We should increase this, and there may be an opportunity to do so now if the UK reaches out to strategically important nations beyond the EU.

Whatever comes to pass, I am confident that the Malaysia-UK relationship will be maintained and strengthened.We are both outward-facing nations, with a diversity of faiths and cultures and strong traditions of moderation and cooperation.

Bound by deep ties of shared history, friendship and trade, our peoples fought alongside each other in the Second World War and during the insurgency in what was then Malaya.We are firm allies in the fight against violent extremism, a scourge which affects us all. We must remain united in that long-term effort.

On a personal note, I have had an excellent working relationship with David Cameron. I am sad to see him depart as Prime Minister, although I respect his principled reasons for resigning. I look forward to working with his successor.

There will be testing times ahead for the UK. But the British people should know that one old friend will always be with them as they open a new chapter in their long history.

 

Heroic Zunar lampoons the Goons, Buffoons and Loony-Tun


November 22, 2015

Cartoonist Zunar lampoons the Goons, Buffoons and Loony-Tun

by Dean Johns

http://www.malaysiakini.com

As I wrote in a column in May last year entitled ‘Zunar zaps the zombies’, there are few if any people I admire more than Zulkifly Anwar Haque aka Zunar, who for years has used his cartoons to lampoon the platoons of goons, buffoons and loony-tunes, not to mention the loony-Tuns, who have long been running – and ruining – Malaysia.

He’s one of the pitifully few heroes in the struggle against the zanies, zealots, xenophobes and moral and ethical zombies of the zalim Barisan Nasional regime, and a shining, shaming example to the millions of Malaysians who remain too lazy, dozy, cosy or just plain gutless to take a stand against the ruin of the country they claim to love by a gang of lying, criminal zeroes.

But, as Zunar reminded us in his appearances in person and interviews on radio and TV during his flying visit to Sydney, UMNO-BN appears to be increasingly becoming one of its own worst enemies by racking-up such an astonishing string of zeroes as to amaze and appall not just formerly dozy Malaysians, but also to attract the opprobrium of the whole wide world.

Khairy Jamaluddin’s Malaysia Boleh National Soccer Team

Everywhere you look these days, from the RM2,600,000,000 that passed through Prime Minister Najib Abdul Razak’s personal bank account and the ongoing fiasco of the RM42 billion 1MDB fraud to the Malaysian football team’s 6-0, 10-0 and now 6-0 again thrashings by such low-level opponents as Palestine and the UAE in World Cup qualifying matches, UMNO-BN is scoring zeroes.

But the human zeroes responsible for such catastrophes are responding to them by doing…nothing. Nada, zip, or to once again repeat our theme here, zero. There is zero sign that Najib intends to ever come clean about either his personal banking transactions or the billions missing from 1MDB.

And similarly zero sign that Youth and Sports Minister in Najib’s alleged ‘government’, Khairy Jamaluddin, intends to take the slightest responsibility for the disgraceful state of affairs in his department.

It is also clear that there is zero chance that any of the other zeroes infesting and supporting the zombie UMNO-BN regime will do anything but absolute zero about getting rid of Najib, Khairy or any of their other partners in crime and incompetence, as they are all without exception either willing accomplices in or accessories to whatever dirty deeds one or more of them commit.

All of which explains why, of course, they have zero tolerance for not only Zunar’s books of cartoons, but also for leaving him at liberty to produce them. As countless formerly UMNO BN-unaware Australians have been outraged to learn this past week, this most talented and persistent of patriots is facing a raft of charges that could earn him about 45 years in jail!

But Zunar himself is undaunted, declaring to the many audiences he addressed this past week that he has no plans to seek refuge from regime repression and retribution in some cartoon-friendly foreign country, but to stay in Malaysia and keep demonstrating his philosophy that ‘even my pen has a stand’.

Ridiculing them right out of power

But, far from seeing himself as a hero against the zeroes, this most modest, unassuming and softly-spoken of men simply considers it his duty as a Malaysian citizen to use his cartooning talents to combat the criminal regime by what he considers the most effective possible means, which is to ridicule them right out of power.

He also hopes to inspire other Malaysians to do whatever they can think of to join him and his fellow opponents of the lying, thieving regime to do however much or little they can to zap the UMNO-BN zeroes. And in this regard he says he is tremendously heartened by the fact that the younger generation of Malaysians of all races and creeds seem to be increasingly demonstrating zero-tolerance of the regime.

Najib Tipu Melayu

King of the Goons

Certainly more and more Malaysians are joining him in seeing Najib and the gang as a laughing-stock, as evidenced by over a million ‘likes’ on social media for one of his most recent cartoons.

And his latest banned book is bound to win him floods more fans. Of course there’s no space here to take you through the entire 128 pages of this hilarious collection, but the cover itself says volumes.

In illustration of the book’s title, ‘Sapuman, Man of Steal’, the cover shows Najib flying along with a bundle labelled ‘RM2.6 billion’ in one hand, and the bat-infested ‘Putar Jaya’ building down below. And of course the drawing also features Zunar’s trademark sketches of a diamond ring, a crone-like creature with a big hairdo with a RM1,200 price-tag and an idiot in police uniform going ‘twit, twit’ on his smartphone.

And in added emphasis of the core message of the cover, the book is priced at RM26 to further symbolise the RM2.6 billion that Sapuman, the super-zero, has been revealed as having received in his personal bank account.

But as fiendishly funny as ‘Sapuman, Man of Steal’ most certainly is, it is far from Zunar’s intention to simply sell lots of copies, get lots of laughs and make himself a hero.

What keeps him drawing cartoons making fun of UMNO-BN hoons, goons and buffoons is the thought that by his efforts he’s helping inspire as many other Malaysians as possible to realise that, if only they can be awakened from their snooze, they can all be heroes in the fight against the zeroes.


DEAN JOHNS, after many years in Asia, currently lives with his Malaysian-born wife and daughter in Sydney, where he coaches and mentors writers and authors and practises as a writing therapist. Published books of his columns for Malaysiakini include ‘Mad about Malaysia’, ‘Even Madder about Malaysia’, ‘Missing Malaysia’, ‘1Malaysia.con’ and ‘Malaysia Mania’.

 

MALAYSIA–Parliamentary Approval for 2016 People’s Budget


November 17, 2015

COMMENT: The fight for change continues. The much anticipateddin-merican-and-dr-kamsiah1 move to reject Malaysia’s 2016 Budget did not materialise since the Opposition failed to garner biparisan support to defeat it. 128 votes in favour of it were convincing enough and our country is spared a fiscal crisis. It is  relief that our government can continue to function with money approved for its programmes in 2016.

While I have been critical of the Prime Minister’s misdemeanors, especially the USD 700 million that went into his personal bank, his lack of transparency and accountability on 1MDB, and his lavish spending ways, I am never comfortable at the prospect of our public administration and security services (defense and police) grinding to a halt at a time of global terrorism just because a disgruntled opposition is trying to use us Malaysians as pawns in their desire to cause the collapse of an elected government.

My message to our Prime Minister cum Finance Minister is that he must be be prudent and smart in spending our taxes. May I also remind him that every tax dollar spent must produce a satisfactory rate of return which is equal to the cost of our sovereign debt. Otherwise, we as citizens will be burdened with  more taxes. That is Fiscal 101 and pure common sense.

Confidence in our Prime Minister’s leadership may not return any time soon. However, if he comes clean on the 1MDB financial scandal, ceases using draconian laws against his critics and stops playing race and religion for his political ends by pandering to racist pressure  groups and religious extremists within and outside UMNO, there is a possibility for the ringgit to bounce back and for much-needed capital inflows to return. –Din Merican

MALAYSIA–Parliamentary Approval for 2016 People’s Budget

by Arfa Yunus

http://www.freemalaysiatoday.com

MOF Najib Razak

Prime Minister Najib Razak may still have the support of Barisan Nasional (BN) lawmakers, evident from the success of the vote on Budget 2016 last night, says UMNO veteran Tengku Razaleigh Hamzah.

He said he himself, voted for Budget 2016 to go through despite talks of him being part of a movement to bring Najib down.Tengku Razaleigh, speaking to reporters at the Parliament lobby here today, said that he had voted in favour of the Budget as he “believed in the government’s plan for the year.”

He, however, was coy when asked if his vote meant that he also supported Najib as the nation’s Prime Minister.“No, that means we support the government programme for the (next) year (as) it was presented by the Minister of Finance, who is also the Prime Minister,” said the Gua Musang Member of Parliament.

“Why these questions? You decide for yourself ok,” he added, refusing to comment further. The UMNO veteran has been linked to a group allegedly led by former Prime Minister Dr Mahathir Mohamad, who aims to have Najib removed from his top post.

Budget 2016 passed the policy stage last night after successfully garnering 128 votes. All BN legislators present, including former Deputy Prime Minister Muhyiddin Yassin voted in favour of it.

This came as a surprise to most as both Razaleigh and Muhyiddin were rumoured to be on the list of seven UMNO leaders currently under the party’s watch for openly criticising Najib.

Economics: Paul Krugman and Larry Summers on secular stagnation and demand


November 3, 2015

Economics: Paul Krugman and Larry Summers on secular stagnation and demand

by Larry Summers

Larry Summers

Paul Krugman suggests that I have had some kind of change of heart on secular stagnation and converged towards his point of view, citing the publication of the transcript of a 2011 debate that we both participated in. I certainly appreciate the gravity of the secular stagnation issue more than I did a few years ago, given the continuing decline in global real interest rates. But I think Paul exaggerates the change in my views considerably.

(Full transcript available here).

http://www.munkdebates.com/debates/north-american-economy

The topic of the debate was: “North America faces a Japan style era of high unemployment and low growth”. Paul argued in favour. I opposed the motion — not on the grounds that the US economy was in good shape, but on the grounds that our demand deficiency problems should be easier to solve than Japan’s.

Quoting from my response to Paul’s arguments:

You’re right the United States has a serious demand deficiency. You’re right that not enough is being done to contain that demand deficiency. You’re right that we will suffer needless unemployment and stagnation until more is done to address that demand deficiency… My thesis is that as serious as that problem is, it is dimensionally much less than the problems that Japan faced in four respects. Japan’s problems were different in magnitude, different in the depth of their structural roots, different in the relative perspective they had — relative to the rest of the world — and different in the degree of resilience their system had for adapting to them…

…It will take time. There are steps that need to be taken but we are a society that works. We are a society whose principal problems — we all up here agree — can be addressed by a change in the printing of money and the creation of infrastructure.”

Paul responded in part by saying:

The question is, are we going to be stuck in a state of depressed demand of the kind that Larry has talked about. Larry and I agree that that is what has been happening… I think Larry and I agree almost entirely on the economics, on what needs to be done.”

I think we have both been focused on demand and the liquidity trap for a long time. There are, though, two areas where I have had somewhat different views from Paul. I believe that  structural issues are often important for demand and growth. I have often asserted that “business confidence is the cheapest form of stimulus,” and quoted to President Barack Obama Keynes’s famous 1938 letter to Roosevelt:

“Businessmen … are … at the same time allured and terrified by the glare of publicity, easily persuaded to be ‘patriots’, perplexed, bemused, indeed terrified, yet only too anxious to take a cheerful view, vain perhaps but very unsure of themselves, pathetically responsive to a kind word. You could do anything you liked with them, if you would treat  them (even the big ones), not as wolves or tigers, but as domestic animals by nature, even though they have been badly brought up and not trained as you would wish… If you work them into the surly, obstinate, terrified mood, of which domestic animals, wrongly handled, are so capable, the nation’s burdens will not get carried to market; and in the end public opinion will veer their way.”

Second, I have never related well to Paul’s celebrated liquidity trap analysis. It has always seemed to me be a classic example of economists’ tendency to “assume a can opener”. Paul studies an economy in liquidity trap that will, by deus ex machina, be lifted out at some point in the future. He makes the point that if you assume sufficiently inflationary policy after this point, you can drive ex ante real rates down enough to stimulate the economy even before the deus ex machina moment.

This is true and an important insight. But it seems to elide the main issue. Where is the deus ex machina? Where is the can opener? The essence of the secular stagnation and hysteresis ideas that I have been pushing is that there is no assurance that capitalist economies, when plunged into downturn, will over any interval revert to what had been normal. Understanding this phenomenon and responding to it seems the central challenge for macroeconomics in this era.

P Krugman

Any analysis that assumes restoration of previous equilibrium is, from this perspective, missing the main issue. I was glad to see Paul recognise this point recently. I suspect it will lead to more emphasis on fiscal rather than monetary actions in depressed economies.

http://blogs.ft.com/larry-summers/2015/11/02/paul-krugman-and-me-on-secular-stagnation… 11/2/2015

Malaysia: The Robin Hood 2016 Budget — Where is the Money coming from?


October 25, 2015

Malaysia: The Robin Hood 2016 Budget — Where is the Money coming from?

by Nigel Aw

http://www.malaysiakini.com

PM-2016Prime Minister Najib Abdul Razak offered a list of good news under Budget 2016 which included a hike in civil servants’ pay, increase in BR1M cash handouts, and Goods and Services Tax rebate for mobile phone purchase.

But where is all the money coming from when the country is facing falling revenue from a slump in commodity prices? Malaysiakini uncovers the ‘bad news’, by breaking down Budget 2016 for you based on ministries which have suffered the worst cuts.

What the Premier failed to mention in his budget speech include the likelihood of pricier cooking oil, more expensive train and flight tickets on ‘uneconomical’ routes, the poor having to pay for their electricity bills, and other subsidy cuts.

1) Finance Ministry – General subsidies almost halved

At first glance, it would appear the Finance Ministry had suffered the worst from an austerity budget, with its allocation being slashed by RM7 billion or 17.8 percent, from RM39.247 billion to RM32.247 billion. However, closer scrutiny showed the heavy cut was made possible through a reduction in subsidies which is expected to go down by a whopping 45 percent, or RM8.707 billion to RM10.633 billion.

Other notable cuts in the ministry include a 95 percent reduction in allocation to the Poor Students’ Trust Fund (Kumpulan Wang Amanah Pelajar Miskin) from RM200 million to a mere RM10 million.

These cuts allowed for increased spending in other areas, including an allocation of RM1.073 billion to deal with the new increase in minimum wage.

The government has already embarked on an aggressive subsidy rationalisation exercise since the beginning of this year and it is unclear where the further subsidy reduction will come from.

2) High Education Ministry – Less money for universities

The second largest cut was targeted at the Higher Education Ministry which saw its budget reduced by RM2.4 billion to RM13.378 billion. To make up for the shortfall, public universities will suffer the brunt of the cut as they will see their funding reduced by RM1.442 billion.

The worst hit universities are Universiti Malaya, followed by Universiti Malaysia Terengganu and Universiti Teknologi Mara, which budget were slashed b 27.3 percent, 23.76 percent and 23.72 percent respectively.

Some MPs, including Bayan Baru MP Sim Tze Tzin, have raised concerns if this will mean higher tuition fees next year.

3) Commodities Ministry – Pricier cooking oil

Plantation Industries and Commodities Ministry saw a 60.76 percent reduction to its budget from RM1.659 billion to a mere RM651 million.While the ministry’s programmes saw an across the board reduction in allocation, it will be the consumers who will feel the burden the most. This is because the single largest cut came from the RM950 million cooking oil price stabilisation scheme which was completely defunded under Budget 2016.

Under the scheme which was introduced in 2007, it ensured a ceiling price on cooking oil, as well as sufficient supply in the market by compensating producers.With the scheme effectively abolished next year, consumers are likely to pay more for cooking oil.

4) Transport Ministry – Train, flight subsidies reduced

The Transport Ministry will see a budget reduction of 14.1 percent, or RM648 million, to RM3.955 billion, the fourth largest cut among the ministries. Areas that will see cuts include subsidies for KTM trains and flights from rural regions.

Specifically, the subsidy on “uneconomical” KTM routes will be slashed by more than half, from RM52.9 million to RM25 million. Subsidy for rural flights, as well as on aircraft rental, will also be reduced by RM5 million from RM160 million.Other reductions will come primarily from the ministries’ operations.

5) Energy Ministry – No more electricity subsidy

The Energy, Green Technology, and Water Ministry comes in at fifth place for the largest allocation cut under Budget 2016, with a reduction of RM605 million to RM2.262 million.

Likewise, it will be consumers who will suffer the most as the single largest slash is the electricity bill subsidy of RM150 million which will be completely defunded. Presently, households which use less than RM20 in electricity have their bill fully subsidised by the government to help poor families.

6) Defence Ministry – Downsized national service

The Defence Ministry will see a budget reduction of RM459 million, the sixth largest cut to a ministry. The amount is relatively small compared to the Defence Ministry’s huge budget of 17.304 billion for next year.The cut came largely from the downsizing of the national service programme which allocation will be reduced from RM614 million to RM276 million.

However, other areas have also seen cuts, including a reduction of RM100 million to RM2.701 billion for air defence, even as the government plans to acquire new assets in difficult economic times.

Under Budget 2016, the Defence Ministry will acquire six Littoral Combatant Ships, Very Short Range Air Defence weapons system, armoured vehicles, and the A-400M Airbus.

7) Urban Ministry – Solid waste management

The Urban Wellbeing, Housing and Local Government Ministry is the only other ministry to have experienced a cut of more than RM300 million.

Under Budget 2016, the ministry will be allocated RM4.173 billion – compared to RM4.572 billion this year – a reduction of RM399 million.The single largest cut will come from solid waste management; its funding will see a reduction of 17.3 percent from RM1.036 billion to RM857.1 million.

It remains unclear how the ministry is going to handle solid waste management while still saving RM178.9 million.However, it should be noted the ministry’s budget provided for RM15 million for the operation of a new landfill next year, which is a more economical method of waste disposal.

*This list excludes the Home Ministry; its Federal Expenditure Estimates has yet to be uploaded by the Finance Ministry.