KEIDANREN : In search of a Grand Design for the Economy and Public Finance (2000-10-02)

In search of a Grand Design for the Economy and Public Finance

Figure 5: Structural reform options
(estimates based on use of macro-econometric model)

Case 1: No expenditure review. All eventualities catered for by increasing burden.

Nature of reform (implementation assumed to start in FY2002 in each case) National and local government expenditure Expenditure (excl. portion of social security financed out of public funds) growth roughly equal to nominal economic growth rate Consumption tax rate increased from 5% to 25.5% Social security Basic pension benefits indexed to wages. Benefits associated with the earnings-related component kept in line with current practice (confined to approx. 5%) Proportion of basic pension paid by treasury raised to 50% Employees' pension insurance premium rate raised in stages to 34.5% Per capita medical expenses raised nominal 4% Y/Y 50% of medical treatment for the aged financed out of public funds, 10% as out-of-pocket expenses Medical insurance burden increased to 1.4 fold, assuming no change in present system

Economic growth rate (FY2000-FY2025)

Real 1.7%
Nominal 3.5%

Central and local government finances Fiscal balance Turns positive in FY2025 Outstanding debt/GDP ratio Approx. 58% in FY2025

Social security funds Pension reserve ¥ 239 trillion (FY2025) Medical treatment Balance more or less in equilibrium

National burden rate (FY2025)

71.80%

Breakdown:: Tax burden: 46.0%
Social security burden: 25.7%

Case 2: Only national and local government expenditure kept in check

Nature of reform (implementation assumed to start in FY2002 in each case) National and local government expenditure Public works cut by nominal 3% Y/Y until FY2011. From FY2012 onwards, they are held steady in real value Non-public works (excluding portion paid out of public share of social security burden) held steady in nominal value until FY2011 and in real value from FY2012 onwards Consumption tax rate increased from 5% to 14.5% Social security Employees' pension insurance premium rate raised in stages to 33.5% Medical insurance burden increased to 1.3 fold, assuming no change in present system Everything else as per Case 1

Economic growth rate (FY2000-FY2025)

Real 1.8%
Nominal 3.5%

Central and local government finances Fiscal balance Turns positive in FY2023 Outstanding debt/GDP ratio Approx. 72% in FY2025

Social security funds Pension reserve ¥ 211 trillion (FY2025) Medical treatment Balance more or less in equilibrium

National burden rate (FY2025)

59.80%

Breakdown:: Tax burden: 35.3%
Social security burden: 24.5%

Case 3: All expenditure, including social security, reviewed

Nature of reform (implementation assumed to start in FY2002 in each case) Expenditure held in check (as per Case 2) Consumption tax rate increased from 5% to 10% Social security Basic pension benefits indexed to prices only. Earnings-related component reduced (Past and future components reduced to 24% and 40% respectively) Proportion of basic pension paid by treasury raised to 50% Employees' pension insurance premium rate raised to 19.5% Rise in per capita medical expenses confined to nominal 3% Y/Y 50% of medical treatment for the aged financed out of public funds; out-of-pocket expenses raised to 20% Medical insurance burden reduced to 85% of current level, assuming no change in present system

Economic growth rate (FY2000-FY2025)

Real 2.4%
Nominal 4.2%

Central and local government finances Fiscal balance Turns positive in FY2024 Outstanding debt/GDP ratio Approx. 76% in FY2025

Social security funds Pension reserve ¥ 210 trillion (FY2025) Medical treatment Balance more or less in equilibrium

National burden rate (FY2025)

46.50%

Breakdown:: Tax burden: 31.5%
Social security burden: 15.0%

Case 4: Portion of social security financed out of public funds raised

Nature of reform (implementation assumed to start in FY2002 in each case) Expenditure held in check (as per Case 2) Consumption tax rate increased from 5% to 15.8% Social security Whole of basic pension funded by the treasury. Medical treatment for the aged and long-term care (excl. out-of-pocket expenses) funded in their entirety out of public funds. Employees' pension insurance premium rate reduced to 14.5% Medical insurance burden reduced to 63% of current level, assuming no change in present system Everything else as per Case 3

Economic growth rate (FY2000-FY2025)

Real 2.7%
Nominal 4.8%

Central and local government finances Fiscal balance Turns positive in FY2024 Outstanding debt/GDP ratio Approx. 76% in FY2025

Social security funds Pension reserve ¥ 209 trillion (FY2025) Medical treatment Balance more or less in equilibrium

National burden rate (FY2025)

46.30%

Breakdown:: Tax burden: 36.3%
Social security burden: 10.0%

Case 5: Fiscal reconstruction implemented at earliest possible date

Nature of reform (implementation assumed to start in FY2002 in each case) Expenditure held in check (as per Case 2) Consumption tax rate increased from 5% to 17.5% Social security Employees' pension insurance premium rate raised in stages to 33.5% Medical insurance burden same as today, assuming no change in present system Everything else as per Case 3

Economic growth rate (FY2000-FY2025)

Real 1.9%
Nominal 3.6%

Central and local government finances Fiscal balance Turns positive in FY2012 Outstanding debt/GDP ratio Approx. 9% in FY2025

Social security funds Pension reserve ¥ 807 trillion (FY2025) Medical treatment Balance more or less in equilibrium

National burden rate (FY2025)

61.30%

Breakdown:: Tax burden: 37.2%
Social security burden: 24.1%

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Figure 5: Structural reform options (estimates based on use of macro-econometric model)

Figure 5: Structural reform options
(estimates based on use of macro-econometric model)