Annual Report on

The Japanese Economy and Public Finance


- No Gains Without Reforms V -

Cabinet Office

Government of Japan

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Chapter 2

From Public Sector to Private Sector - Reconstruction of the Government Sector and Associated Challenges

Key Points of Chapter 2

Section 1 Views on Small Government
 Large governments could have a negative impact on economic activities through public sector inefficiency, while taxation and social insurance premiums could also negatively affect capital accumulation and the labor supply.
 According to the conjoint analysis based on the survey on national contribution, the utility (satisfaction) gained from increase in the social security benefits and the loss of utility due to increase in the national contribution ratio were of equal levels. However, the loss of utility due to the increase in tax burden among the young respondents was larger relative to the other age groups.

Section 2 From Public Sector to Private Sector - Various Methods
 Privatization and contracting out the provision of public services to the private sector under the policy of "from public sector to private sector," and utilizing the know-how of the private sector will contribute to improving the quality and efficiency of the public services provided.
 According to the analysis based on the survey on the Designated Management Entity System, those businesses providing services after the implementation of the system offer an improved service over the previous businesses. By entity, the private commercial enterprises provide services of highest quality.
 Privatization of NTT, JR and other entities has contributed to improvements in efficiency, innovation and service diversity.
 There are areas where advantages of public financial institutions have decreased compared to before, suggested by the cost-benefit performance of those institutions which have been showing sideways movements recently.

Section 3 Reform of Local Public Finances
 In aiming to achieve a small government based on the policy of "from public sector to private sector," it is important to expand the autonomy of local governments, to reform the uniform administration at a national level, and to increase the administrative fiscal efficiency of local governments as they stand the closest to the residents who utilize public goods.
 Increases in the size of the municipality through mergers of local authorities tend to be accompanied by a decrease in administrative costs per resident.
 When estimating the impacts of the administrative reforms on the 655 cities across the country and the 23 wards in Tokyo, cost containment effects are detected through reforms including right-sizing the number of staff.

Section 4 Challenges in Aiming for Small Government
 For the publicly regulated markets, including medical care, nursing care, education and child-care, private commercial agents have also entered parts of these markets through measures such as the Special Zones for Structural Reform. Improvements in efficiency are expected to be seen in these markets with the entry of private commercial agents.
 In market tests that directly compare private and public sector efficiency through competitive bids, the most efficient businesses are granted the project. Model projects on a trial basis will be implemented starting FY2005.
 In order to utilize the policy of "from public sector to private sector," it is important for the public sector to further develop its system in the employment front and others. Furthermore, in order for the policy of "from public sector to private sector" to lead to administrative fiscal efficiency, it is important to develop a competitive environment whereby those providing administrative services are constantly faced with competitive pressure.

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