Can special accounts bail out govt? / Controversial ‘buried treasure’ touted as possible financial silver bullet
Written by Writer on Tuesday, October 21st, 2008
Can special accounts bail out govt? / Controversial ‘buried treasure’ touted as possible financial silver bullet
Hiroshi Arimitsu / Yomiuri Shimbun Staff Writer
(Oct. 21, 2008)
The controversy surrounding Kasumigaseki’s “buried treasure” has sparked back into life.
This “treasure” constitutes reserve funds and surpluses in the central government’s special accounts that possibly could be used to fund spending, such as economic stimulus measures and social welfare plans.
Arguments over the possibility of raising funds from this money, or other sources not dependent on tax hikes, have continued to rumble on, irrespective of the boundaries between the ruling and opposition camps.
The brouhaha comes as expectations rise about using the reserve and surplus funds as a last resort to solve difficulties in finding fiscal resources for new policy measures.
In light of a looming general election, the ruling coalition and opposition parties are having trouble seeking public approval for a tax raise for new policy measures, although tax revenues have been shrinking due to a business slowdown.
In a bid to cope with a global financial crisis, Prime Minister Taro Aso instructed his Cabinet and executives of the ruling coalition parties last Thursday to chart out an additional economic stimulus package.
Indications are that the controversy surrounding the buried treasure is set to intensify further.
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Defining ‘treasure’
Kasumigaseki’s buried treasure has yet to be strictly defined. The term was coined by Liberal Democratic Party Diet members in autumn 2007 in reference to legendary riches allegedly buried by the Tokugawa shogunate government in the closing days of the Edo period (1603-1867) at Mt. Akagi, Gunma Prefecture, as the shogunate was facing defeat by Meiji government forces. Kasumigaseki, located in the heart of central Tokyo, is home to many government ministries and agencies.
In general, the treasure term is used to refer to a portion of reserve funds and surplus resources in the government’s special accounts deemed to be usable for financing policy measures.
The government’s accounting system comprises two major categories: the general account and the special accounts. The general account refers to revenues, mostly tax-derived, and expenditures related to the execution of a wide range of policies such as national security, education, police activities and government personnel affairs.
The special accounts are used to manage specific government programs, including the pension system, government-run health insurance plans, road construction and other public works projects, as well as managing tasks related to foreign exchange and the handling of fiscal investment and loan programs.
According to estimates by the Finance Ministry, reserve and surplus funds in the special accounts are expected to total 187 trillion yen at the end of fiscal 2008.
A breakdown of this figure shows that reserves and surpluses in the Pension Special Account will reach about 131 trillion yen, while those in the Foreign Exchange Funds Special Account–used for stability in relation to foreign exchange rates–will stand at 19 trillion yen at the close of this fiscal year. The corresponding figures are 14 trillion yen for the Labor Insurance Special Account, which covers workplace accidents and unemployment allowances; 10 trillion yen for the Government Debt Consolidation Special Account for servicing government bonds; and 10 trillion yen for the Fiscal Investment and Loan Program Special Account that lends cash to government-affiliated financial institutions and independent administrative bodies.
There currently are 21 special accounts, with a combined net expenditure in the initial budget for fiscal 2008 of 178 trillion yen. The expenditures mostly are connected with the redemption of government bonds and interest payments on government debts and pension payments.
Outlay from the special accounts comes to more than five times the net expenditures of the general account, totaling about 34 trillion yen, and is used to fund basic administrative services such as social welfare and education.
Partly due to the wide gap in expenditures between the general and special accounts, it has been said the reserve funds in the special accounts have been left idle.
A policy study panel connected with an LDP intraparty faction, the Seiwa Policy Research Group, has estimated how much can be squeezed from the buried treasure.
The panel said more than 50 trillion yen could be raised by taking steps such as selling off surplus housing and related facilities for government employees, in addition to generating profit by selling equities after allowing the privatization of state-run universities and independent administrative institutions. Officials who administer the special accounts have been subject to repeated public criticism for using funds wastefully.
Some legislators in the ruling and opposition blocs insist that considerably more than 50 trillion yen could be raised if the squandering of cash was stymied via a transparent flow of money through the special accounts.
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Hoping for a gold strike
Two special accounts in particular are attracting considerable attention: the Fiscal Investment and Loan Program Funds Special Account (FILPSA) and the Foreign Exchange Funds Special Account (FEFSA).
FILPSA collects funds by having the government issue fiscal investment and loan bonds to such bodies as government-affiliated financial institutions and independent administrative institutions. If interest on the lending is more than the yield payment on the bonds, profits accrue in the special account.
FILPSA’s reserves derive from profits from interest. Returns on investments made using the profits are expected to stand at 10.2 trillion yen by the end of fiscal 2008.
Under the Special Account Law, 5 percent of assets in the special account must remain untapped to guard against possible losses when interest receipts dip below the bond yield payments.
Profits in excess of this 5 percent level must be used to service government bonds and support related purposes through the Government Debt Consolidation Special Account.
FILPSA’s current reserves stand at 5 percent of the assets.
Calls are rising for profits in excess of this 5 percent, if any, to be used for policy purposes. Proponents of this idea claim the special account could not suffer a loss as the current long-term interest rates linked to the rates of the yields will most likely remain low compared with the interest rates that were set for borrowing money from the account in the past.
FEFSA raises funds by issuing financial bills, or short-term government securities, which, in the event of the dollar’s depreciation, for instance, will be used for dollar-buying operations through the purchase of U.S. government bonds to stem the rise of the yen.
As of the end of September, FEFSA’s dollar-denominated assets stood at 995.8 billion dollars (about 99.5 trillion yen).
This figure has primarily been generated by interest revenues derived from U.S. government bond holdings, which amounted to 19.6 trillion yen by the end of fiscal 2008.
Interest revenues and related income in fiscal 2007 produced a surplus of 3.9 trillion yen in this special account, which the major opposition Democratic Party of Japan argues should be used effectively.
The Finance Ministry, for its part, has transferred considerable amounts–more than 20 trillion yen–from this account to the general account.
Ministry officials, however, point out that the value of the dollar-denominated assets, in terms of the yen, is bound to shrink if the yen continues to appreciate.
In light of the risks of exchange rate fluctuations seen from a medium- and long-term perspective, FEFSA’s reserves should stand at about 30 percent of its total assets. However, the current percentage of the reserve ratio is no more than half this level, officials said.
Finance Minister Shoichi Nakagawa, concurrently minister in charge of financial services, is skeptical of the “buried treasure” theory.
Speaking during a Diet interpellation last week, Nakagawa said the special account reserves could suffer latent losses in terms of the yen if the yen is still strong against the U.S. currency–at a level stronger than 99 yen a dollar–at the end of this fiscal year.
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Why the contention?
The reason for the controversy over the buried treasure is the lack of a clear-cut way to secure fiscal resources aimed at addressing urgent policy tasks. These tasks include tackling the rapidly rising costs for social welfare programs and the need for business stimulation measures in the face of a shaky global economy triggered by the subprime loan crisis in the United States.
The nation’s economy is seen to have entered a contraction phase, causing tax revenues to plunge sharply.
At a meeting of the Budget Committee of the House of Councillors late Tuesday, Aso said, “Corporate tax revenues are set to continue dropping dramatically.”
If the government issues new deficit-covering bonds to make up for dwindling tax revenues, the central government’s debts–estimated to reach 615 trillion yen by the end of fiscal 2008–would further balloon, running counter to the government’s pledge to resuscitate its finances.
Although tax hikes could be one way of resolving the dearth of fiscal resources, higher taxes amid worsening business conditions would aggravate contracting business activities and declines in consumer spending.
As the next general election approaches, both the ruling coalition parties and the opposition are keen to avoid discussing possible tax hikes.
This is why the issue of possible fiscal resources derived from the buried treasure continues to gather momentum.
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Magic solution?
Reserves in the special accounts can be seen as “savings” that have accumulated year on year. Once a portion of the reserves is disbursed, it will take a considerable time for the funds to return to their former level.
Since the reserves cannot be considered a stable source of future funding, some say dipping into the funds for annual policy expenditures is not a good idea.
Any plundering of the special accounts likely will lead to a worsening of the government’s finances.
According to the government’s financial statement on its assets and liabilities for fiscal 2006, the combined liabilities of the general and special accounts surpassed the assets by as much as 277.3 trillion yen.
If the buried treasure is used, the government’s net capital deficiency will deteriorate even further.
As such, many analysts say the most effective way of using the special account reserves is to help lessen the outstanding balance of the government bonds.
If the reserves are used to redeem the bonds previously issued by the government, bond-servicing costs, and the further issuance of bonds, can be reduced.
Given that the outstanding balance of the central government’s bond issues is expected to reach 553 trillion yen by the end of this fiscal year, utilizing the special account reserves only have a limited effect on reducing the government’s debts. This likely would be no more than a reduction of about 750 billion yen–even if the buried treasure is assumed to be 50 trillion yen and the long-term interest rate remains at 1.5 percent per annum.
The government’s overall debt-servicing costs, including temporary borrowing, amount to an annual 9.3 trillion yen. Based on the initial budget for fiscal 2008, even if the special account reserves were used in their entirety to reduce the government’s debts, it would only lessen them by less than 10 percent.
Although the controversy over the buried treasure might help activate discussion about ways of finding fiscal resources and the need to clarify how the reserves are used, the special account reserves cannot be relied upon to help reduce the government’s debts.
In the final analysis, the hubbub over the reserves should be replaced by in-depth discussions on specific measures to cut government expenditures, and full-fledged tax reforms to alleviate possible burdens on future generations.
