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Friday, Nov. 23, 2012
Maintain fiscal discipline
Just a few hours before Prime Minister Yoshihiko Noda dissolved the Lower House on Nov. 16, the Democratic Party of Japan, the Liberal Democratic Party and Komeito struck a political deal in the Upper House, passing a special bill to float deficit-financing bonds to cover some 40 percent of the fiscal 2012 budget. The opposition forces, which control the Upper House, had held the bill hostage to financially corner the Noda administration.
Without the bill's enactment, the government would have run out of budget funds by the end of November. So, in the short term, the enactment has prevented Japan from plunging into a serious fiscal problem. But it raises difficult issues.
The three parties also revised the bill to let the government issue deficit-financing bonds through fiscal 2015 once the budget is enacted. This should not justify fiscal extravagance. The Diet must keep a strict watch on the future government's spending policy.
Under the Constitution, the Lower House's decision on the budget takes precedence over the Upper House's. But so far, a special bill has had to be passed every year by both the Lower and Upper houses to allow the issuance of deficit-financing bonds. This was to secure fiscal discipline. A divided Diet, in which the opposition forces control the Upper House, can hamper the execution of the budget by refusing to pass such a bill.
The revision of the bill this time by the DPJ, the LDP and Komeito means that whatever parties become opposition parties, the future government can issue deficit-financing bonds annually through fiscal 2015 without getting the opposition forces in the Upper House to agree. Revision of the bill is also aimed at avoiding confusion in state finances.
It is important the government remember that the Public Finance Act only allows issuance of so-called construction bonds — revenues from which are used to build infrastructure — and does not allow issuance of deficit-financing bonds from the outset. As a way out of this restriction, a special bill was enacted in 1965 for the first time after World War II to allow issuance of deficit-financing bonds for the fiscal 1965 supplementary budget. It set a precedent requiring that such a one-time bill be enacted in a year when issuance of deficit-financing bonds is considered necessary. Such bonds are called "exceptional case bonds."
Nine opposition parties including People's Life First, the Japan Communist Party and the Social Democratic Party opposed last week's revision of the bill and said in a statement that passage of the bill not only deviated from state finance principles under the Constitution and in the State Finance Law but also removed restraints needed to ensure fiscal discipline.
The DPJ, the LDP and Komeito must pay attention to this criticism, and the government should keep in mind the principles stipulated by the Constitution and the State Finance Law.