Thursday 21 June 2012

Welfare cuts won't solve Japan's debt

By Bruce Gale, The Straits Times, 20 Jun 2012

LAST month, when popular Japanese comedian Junichi Komoto was discovered to have arranged for his mother to collect welfare payments - despite the fact that he earned 50 million yen (S$807,000) a year - there was a national outcry.

Politicians joined talk-show hosts in criticising him. There was nothing funny, they argued, about people allowing their relatives to claim welfare at a time when the ranks of the poor were growing and the government was struggling to reduce the national deficit.

Japan's fiscal position is certainly worrying. This year, debt service accounts for 43 per cent of government revenue, up from just 4 per cent in the early 1970s. As a result, more than half of public spending is financed by new debt issues.

Japan's debt to gross domestic product ratio already stands at over 200 per cent. Failure to get the country's finances in order could therefore come with a heavy price. In late March, foreigners sold more than 2 trillion yen in Japanese bonds, one of the biggest outflows since the global crisis in September 2008.

Japanese Prime Minister Yoshihiko Noda wants to double the 5 per cent sales tax to help pay for increasing welfare costs as the population ages. But the proposal is deeply unpopular.

Politically, cutting welfare payments looks like a far easier option. Whether it will result in a fairer system or succeed in reducing government expenditures significantly, however, is far from clear.

Reacting to popular outrage against Mr Komoto, and what conservative politicians insist are glaring loopholes in the system, Welfare Minister Yoko Komiyama has responded by tightening administrative procedures. More effort, she says, will be put into ensuring that relatives take responsibility for those who fall on hard times.

Reduced welfare payments are also being considered. And Ms Komiyama has asked bankers' associations to make it easier for officials to check the savings accounts of relatives as well as applicants.

But how much money will this save? Critics of the system point out that last year, the number of recipients of the government's basic welfare payments exceeded two million for the first time since the 1950s, after nearly doubling in the past 10 years.

The government's budget for the programme now accounts for nearly 4 per cent of the overall national budget.

But such a development is hardly surprising given that the national economy has been stagnating for almost two decades.

As for abuses, an investigation by the Welfare Ministry in 2009 found irregularities in only 1.5 per cent of cases. Welfare advocacy groups also argue that strong cultural taboos ensure that the vast majority of eligible citizens do not even apply.

Focusing on cases like the one involving Mr Komoto, they say, will only make matters worse.

The point was underlined in February when a three-member family in Saitama, just north of Tokyo, was discovered dead in a flat devoid of any food or money. Local media reports suggested the family was too ashamed to admit they needed financial help.

According to the Health Ministry, about 700 people have died of apparent starvation in Japan since 2000. Some observers expect this figure to rise as the impact of the nuclear disaster in March last year results in more middle-aged men losing their jobs.

In other words, those who emphasise the need to reduce welfare expenditure as a means of balancing the budget are looking for solutions in the wrong place.

There are far more important things that need to be done. Increasing the sales tax is one.

Stimulating the economy by overcoming vested interests opposed to Tokyo's participation in major trade groupings such as the Trans-Pacific Partnership is another.

It is understandable why such measures are not adopted. After all, they threaten the political futures of the politicians who dare to advocate them.

'It's easy to say things that will make you popular,' Foreign Minister Koichiro Gemba told Japan's biggest business lobby Keidanren on June 5. 'Real politics is about doing unpopular things if they are necessary.'

A key problem facing reformers is that Japan remains a very prosperous society, even if economic stagnation and an ageing society suggest long-term decline.

Speaking to the Financial Times last month, former minister for economic policy Heizo Takenaka put it well. Japanese society, he said, is 'very comfortable - too comfortable to change'.

In such circumstances, the fact that the nation's opinion leaders have taken to highlighting spurious issues is hardly surprising.

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