Annual Report on

The Japanese Economy and Public Finance

2005

- 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

    Public finance in Japan remains in a difficult state, with government debt increasing to the highest level among industrialized countries. Fiscal burden is expected to increase further reflecting declining birth rates and rapid aging of the population. Furthermore, despite an increase in new demands for public services generated by changes in the economic and social environment, the government has fallen behind in scaling back or terminating its services in the areas where government's intervention is no longer needed. As a result, limited resources in public sector are not necessarily distributed in an appropriate manner. Meanwhile, as fiscal burden is increasing, assessment of the quality and effectiveness of the public services by the public becomes more critical. These developments have imposed on the government the crucial task of making the required reforms to provide more effective and high-quality public services. To this end, the government should specialize in areas of activity where intervention by government is truly necessary, while, for other public services, the experience and expertise of the private sector needs to be utilized through a shift "from public sector to private sector." This shift must also be accompanied by a similar transfer of responsibility "from the State to the regions" aimed at clarifying the relationship between the benefits and the burden of public services and increasing the autonomy of local governments so that they can choose to implement public services, that truly meet the needs of the residents, on their own responsibility, and, in an independent and efficient manner. This chapter will first examine problems associated with the size of the government sector and analyze people's preference over government size. Then, it will discuss the current state of and challenges involved in reappraising the new relationship between the public and private sectors and that between central and local governments.

Section 1 Views on Small Government

1. The Size of Government

    The term "small government" is generally used in reference to the scale of public finance represented by government spending and fiscal burden, but it also relates to the strength of public regulations and the share of public corporations in the economy. The following are the characteristics of Japan's current situation regarding the size of government in both senses of the term.

(1) The size of government from the perspective of government spending and fiscal burden

 International comparison of size of government spending and fiscal burden
    Among industrialized countries, Japan can be characterized as having a "small government" in terms of the scale of government spending. According to the Organisation for Economic Cooperation and Development (OECD) statistics, the scale of spending by the general government in 2004, including central government, local government and the social security fund, is, for Japan, about 37% relative to GDP. Although this is higher than 36% for the United States, it is less than 49% for the average of the eurozone and 41% for the average of OECD countries (Figure 2-1-1). With regard to the components of spending, the weight of economic and public spending including public investment in Japan is somewhat high compared with other countries, but spending on such general public services as defense and public security, and on health care and social security is relatively small (Appended Table 2-1).
Figure 2-1-1 Level of general government spending of OECD countries (Relative to nominal GDP) (2004)
    The size of fiscal burden expressed in terms of the national contribution ratio calculated by dividing taxes and social insurance premiums by national income is about 36% for Japan (FY2005). However, if the future burden associated with fiscal deficits is factored in by adding this portion to the national contribution ratio to calculate the potential national contribution ratio, the result is about 45% (in FY2005), with the economy carrying a fiscal deficit of nearly 9% as a percentage of its national income. The figure of about 45% is low compared with 68% for France (2002) and 71% for Sweden (2002), but is high compared to 38% for the United States (2002) (Figure 2-1-2). Japan carries a public debt outstanding of about 150% relative to GDP and it is expected that the scale of government spending and fiscal burden will expand reflecting declining birth rates and rapid aging of the population. If policies are left unchanged, Japan is expected to head toward "big" government in terms of spending and fiscal burden.
Figure 2-1-2 International comparison of potential national contribution ratios

 Factors that determine the scale of government spending
    The rise in the scale of government spending can generally be attributed to the expansion of the government's redistribution function through increases in government transfer spending and social security spending due to the shift to welfare state. In particular, it can be thought that the rapid aging of the population and increases in the structural unemployment rate, coupled with a maturing social security system, have contributed substantially to expanding the scale of government spending. A regression analysis with a panel of 20 OECD countries for which long term data was available was conducted to examine the relationship between the percentage of elderly persons in the population and unemployment rates and the scale of general government spending, and it showed that these factors have contributed significantly to the expansion of government spending (Appended Note 2-1). Comparing Japan with other OECD countries, it is observed that, in the case of Japan, the aging of the population is a major factor, while the contribution of changes in the unemployment rate is small (Figure 2-1-3). Disparities among those countries are quite large for the remaining unaccounted factors excluding the impact of the aging of the population and changes in the unemployment rate. Although for the US and Japan these unaccounted factors are relatively small, they are relatively large for European countries. This indicates that there is a sizable portion of government spending that simply cannot be explained by the aging of the population and unemployment rates. The existing studies concerning the expansion of government spending suggest that expansion could be attributed to excessive supply of public goods due to the political system or structure; that the rigidity of the government sector and the irreversibility of decision-making could lead to gradual increases in government spending; and that international competitive pressures could generate pressure for an expansion of fiscal spending by way of increases in domestic unemployment.(1)
Figure 2-1-3 Relationship of the scale of general government spending to aging rate and unemployment rate

(2) Size of government in terms of the strength of public regulation

 Weight of the publicly regulated market in the economy
    Concerning government size, the degree of government's influence on society and the economy sometimes draws attention. The government has imposed certain standards and restrictions on economic activity of industries in order to secure fair competition terms, consumer safety, health care, environmental protection and disaster prevention. It also regulates the qualifications and number of market participants, production volumes and prices. If intervention by government in economic activity becomes excessively large, market distortion arises preventing the efficient and appropriate distribution of resources. To examine the situation of these regulations toward industry, the weight of the regulated sectors in the total value added of that industry (the regulation weight) was calculated based on the Input-Output Table to find difference between the situations in 1995 and 2000 (refer to the Ministry of Internal Affairs and Communications (2000) for the 1995 analysis). The results of these calculations show that the regulation weights of construction, finance and insurance are 100%, while those of transportation, telecommunications, broadcasting, electric power, gas and water works range from 75% to 90%, and little change can be seen between 1995 and 2000 (Table 2-1-4). These figures can be attributed to the fact that regulatory framework covering industry as a whole remains in order to ensure fair competition and safety, although the strength of each regulation in those industries has diminished due to deregulation. Manufacturing and service industries, on the other hand, include a variety of sectors, a considerable number of which are not subject to any special business regulations. For this reason, the regulation weight is comparatively small in those areas. For the economy as a whole, the proportion of regulated industries in 2000 was about 33%, which is a slight decline from about 34% in 1995, but is not seen as a significant change.
Table 2-1-4 State of regulation by industry

 Changes in the strength of regulation
    It is undeniable that the method of assessing regulated industries by means of the presence or absence of industry law as in the above analysis fails in some ways to reflect changes in regulation. In fact, since the latter half of the 1990s many restrictions on entry to industry sectors aimed at controlling demand and supply were eliminated. Promotion of new entry and measures to increase flexibility in price setting took place regarding such network industries as telecommunications and electricity. In order to indicate the qualitative changes in the status of regulations with quantitative data, OECD has calculated and published Product Market Regulation Indicators of the member countries (Figure 2-1-5). Product Market Regulation Indicators are based on the results of a questionnaire survey of officials of the OECD member country governments, and were calculated after further modifications using objective information and data from the OECD Secretariat. The indicators consists of three broad areas: state control, barriers to entrepreneurship and barriers to trade and investment. The strength of regulation in these three areas is expressed quantitatively by means of the number of instances falling under the various assessment criteria, with larger numbers indicating stronger regulation.(2)
Figure 2-1-5 International comparisons of regulations (OECD Product Market Regulation Indicators)
    Judging from these indicators, the overall strength of regulation in Japan declined from 1.9 to 1.3 between 1998 and 2003, showing that Japan is definitely on a course of deregulation. In addition, the relative strength of regulation in Japan within OECD has also declined. An analysis of regulatory strength by industry in Japan reveals that regulations have been relaxed by the largest extent with respect to barrier to entrepreneurship, with a substantial improvement in the licensing and permits system and in the communication and simplification of rules and procedures. Improvements have also been made toward trade and investment barriers such as discriminatory procedures, as well as in state control, such as price controls, and use of command and control regulation.

2. Impact of Government Size on Economic Activities

 Size of government spending and fiscal burden and economic activity
    What sort of impact does the size of government spending and national contribution have on economic activities? Theoretical arguments that claim that the swelling of government could reduce economic growth rate include: i) The principles of competition do not readily operate in the public sector, making its activity to be inefficient compared to the private sector; ii) Distortions in taxation and the contributions have a negative impact on capital accumulation and labor supply; iii) Economic loss (moral hazard and expansion of vested interests) accompanying the expansion of income redistribution cannot be ignored. Contrary views include one which argues that market failure or externalities of the economy could be corrected through appropriate intervention by government, stimulating economic activity in the private sector as a result. Others also argue that, in theory, there is no clear connection between national contribution ratio and economic growth rate.
    In order to investigate the relationship between the size of government and economic performance, an estimate was made based on the existing studies using panel data estimates of OECD countries from 1988 to 2003 (Table 2-1-6).(3) A single regression analysis simply showed that there is a negative relationship between the scale of government spending and the real growth rate (Case 1). However, with this type of single regression analysis, the main explanatory variables possibly affecting economic growth are not included in the estimation formula and therefore bias could have entered into the results of the estimate. For this reason, other possible factors that could affect the economic growth rate were added to the estimate, including the level of real per-capita income (postulating the catch-up effect whereby the growth rate is higher in countries with lower income levels); the value of imports and exports relative to GDP, an indicator that expresses the degree of openness of the economy (the higher the degree of openness is, the higher growth rate will be due to competition with overseas economies and the inflow of the new technology incorporated in products); and the percentage of persons 65 years or older in the population. These variables were incorporated into the estimate, and the correlation of government spending with the economic growth rate was estimated again.(4) The results indicated that in each case, size of government and the real economic growth rate had a negative relationship (Case 2 and Case 3). In addition, by selecting out two categories of government consumption and government fixed capital formation from government spending, and analyzing their effects separately, the former category had a negative impact on the growth rate, while, statistically, the latter had no impact (Case 4).(5)
Table 2-1-6 Size of government spending and economic performance
    Another empirical work also shows that reductions in the size of government spending could have a positive impact on the real growth rate in the medium term. According to a simulation using the Cabinet Office's Model for Medium- to Long-Term Perspectives of Japanese Economy (Mark I), reductions in social security benefits or the burden first decrease the disposable income of the elderly, whose consumer propensity is high compared with younger people. This reduces consumption and depresses the macro-economic growth rate.(6) However, as the employment rate among elderly persons whose pension benefits have been reduced later increases, and the decrease in employer's contribution to social security leads to an increase in capital investment, it results in a rise in the real growth rate in the medium- to long-term.
    The results of these estimates should be viewed as illustrative cases as they can differ depending on the setting of the model and other details of methodology.

 Distortions in resource allocation incurred by the public sector and impact on economic activity
    Another important point of view when considering the relationship between the size of government and the economy is the degree of the distortions in the allocation of resources incurred by the public sector. For example, if government and public corporations account for an inordinate proportion of economic activity, the economic resources occupied by the public sector are not used effectively, and the productivity of the economy as a whole could decline. In addition, in cases where regulation by government restricts competition in the market and saps the vitality of the private sector, economic performance could deteriorate due to the presence of government. Furthermore, in cases where taxes and the social security burden imposed by the government work to reduce labor supply incentives and disturb incentives for companies to conduct optimal investment and production activities, big government could affect economic activities.
    For example, an OECD study has shown that government regulations that restrict competition have the effect of suppressing total factor productivity of the economy as a whole. This study also indicated that deregulation and privatization can increase productivity (Figure 2-1-7, Appended Table 2-3).(7) This is because, intrinsically, competition in the market improves companies' X inefficiency (a generic term describing the various inefficiencies that arise when competitive pressure is weak and companies have deviated from the path of profit maximization). At the same time, competition encourages companies to reduce costs and strive for business development, and also generates incentives to introduce new technologies in advance of competitors. For these reasons, competition is connected to mid- to long-term improvements in efficiency. Moreover, through privatization, ownership of company is transferred from the government to the private sector, which strengthens monitoring of corporate activities since stockholders who have a greater direct interest in the company take part, and as a result company efficiency is expected to increase.
Figure 2-1-7 Productivity and the strength of regulations
    An existing analysis(8) that focused on OECD countries between the 1980s and the 1990s examined the relationship between the tax wedge and the structural unemployment rate. The study suggested that when the tax wedge, which expresses the ratio of individual income tax and social insurance premium burden relative to total labor costs, becomes large, an increase in the structural unemployment rate is likely. This conclusion is based on the hypothesis that when companies' labor demand is held constant, the tax wedge, along with unemployment insurance benefits, employment protection regulations, the minimum wage system and the method of wage negotiations act to push up the wage setting curve (for companies, hiring costs increase) and this works to raise the structural unemployment rate (the OECD analysis assumed a non-accelerating inflation rate of unemployment or NAIRU).(9)
    In Japan, the present tax wedge is still at a low level even within OECD countries, but in the past decade from 1994 to 2004, it increased by about 5% points (Table 2-1-8).
Table 2-1-8 Tax wedge and structural unemployment rate

3. Public Awareness on the Size of Government

 Fiscal burden expected to rise in the future
    The accelerating trend toward declining birth rates and aging of the population in Japan is increasing the probability that without policy changes, the scale of social security benefits and burden encompassing pensions, medical care, nursing care and other services will expand beyond the economic growth rate in the future. For example, according to Prospect for Social Security Benefits and Burden (Ministry of Health, Labour and Welfare, 2004), it is projected that national social security contribution will increase from 78 trillion yen (or 21.5% of national income) in FY2004 to 155 trillion yen (or 29.5% of national income) in FY2025. In "Proposal Concerning the Formation of the FY2005 Budget" (Financial System Council, November 2004), estimates are given that can serve as a yardstick for judging the size of the future overall national contribution. Assuming that the tax burden and the fiscal deficit relating to the portion of expenditures other than social security is kept unchanged at the present level (about 26.5% relative to national income), the potential national contribution rate will increase from the mid-40% level in FY2004 to about 56% in FY2025 (Figure 2-1-9).
Figure 2-1-9 Potential national contribution ratio in 2025 (mechanical calculation)

Column 2

Size of Government in 2030 as Estimated in Japan's 21st Century Vision

    In order to draw a clear picture of Japan during the next quarter century (up until 2030) as the country emerges following structural reform initiatives, the Council on Economic and Fiscal Policy (CEFP) established a special board which prepared, in April of 2005, the Japan's 21st Century Vision. This report describes the shape of the future relating to a wide range of issues such as economic and fiscal prospects, competitiveness, lifestyles and regions and globalization. It also presents the results of a simulation concerning the pattern of fiscal consolidation up to 2030, an estimate for reference developed by the Economic and Fiscal Prospects Working Group.
    This simulation attempted to give shape to fiscal management after the beginning of 2010 when a surplus in the primary balance will be achieved through expenditure reductions as indicated in the reference estimate of "Reform and Perspectives." From a variety of options, the simulation postulates two cases*: Case 1, in which, after the beginning of 2010, expenditures, excluding interest payments, are reduced and held constant relative to the size of the economy, and Case 2, in which the same level of administrative services at the beginning of 2010 in terms of expenditure is maintained and a surplus in the primary balance of the same level as in Case 1 is achieved by requiring an increase in national contribution. In addition to these two cases, a control case was also postulated in which reform of expenditure cannot be carried out after FY2007, unlike as assumed in "Reform and Perspectives."
    The results of this simulation are given in Column Table 2. Attention is drawn to the potential national contribution ratio (relative to national income) in 2030, which is expected to be about 44% in Case 1 (reduce expenses), about 50% in Case 2 (maintain expenses at the same level, increase national contribution), and about 58% in the control case (no change in finances). Depending upon the content of efforts to improve the fiscal balance from FY2007, however, as will be the subject of upcoming debate in the government, it is necessary to note the possibility that general government expenditures and the potential national burden rate in FY2030 will be higher than the figures in Column Table 2.
    * The two cases on which this simulation was based were selected from the various options by Kazuo Yoshida, Chairman of the Economic and Fiscal Prospects Working Group.

Column Table 2 State of Finances in 2030


 Public awareness on the potential national contribution rate
    The question as to whether Japan should aim toward an American-style "small government" or permit the rise of a European-style "big government" in terms of maintaining a balance between the level of public services provided and the associated burden that must be shouldered will, ultimately, be decided by the citizens of Japan. In March 2005, an awareness survey was conducted concerning national contribution by taking a random sample of 2,000 households nationwide (1,118 households in terms of the number of questionnaires actually returned). The survey focused on two questions: what level of national contribution rate was considered appropriate by households and what public services should be consolidated in order to achieve this level.
    First, after explaining the definition of potential national contribution rate and other concepts to respondents, subjects were asked if they knew that the present level of national contribution rate had reached about 45%. The result was that 16.9% of respondents said they knew, while 82.9% said they did not (Figure 2-1-10). When asked about the possibility that the potential national contribution rate could increase to about 55% or above in the future, 17.7% of respondents said that they knew, while 81.8% of respondents said that they did not, about the same percentages as with the first question. Subjects were then asked if the government's target of limiting the potential national contribution rate at about 50%(10) was appropriate, most responded that it was "too high," as opposed to "too low" or "appropriate."
Figure 2-1-10 The results of the awareness survey on national contribution

 Estimate of preference for public services and potential national contribution rate through conjoint analysis
    The results of the above survey indicate that citizens prefer a smaller government to the government's targeted potential national contribution rate of 50%. However, in this simple questionnaire format, respondents did not consider a reduction in benefits (e.g. a reduction in social security benefits or a cutback in public services) resulting from the measure to keep the potential national contribution rate under 50%. Consequently, it is highly probable that the results obtained tend to have downward bias. Therefore, an attempt was made to correct this deficiency by using the method of conjoint analysis (a method of evaluation which has subjects make pseudo-decisions regarding the burden in the questionnaire survey). Respondents were asked to select the most desirable combination from several options concerning social security benefits and the level of public services along with the potential national contribution rate required to finance these expenditures. Through this method, then, the preferences of the public over policy options were examined by linking the benefits (level of social security benefits and public services) with the burden people shoulder.(11)
    In the specific method used in this research, a basic scenario was postulated in which current policies are maintained and the potential national contribution rate reaches 56% in 2025. Then, as counterproposals, three policy proposals specifying various patterns of reductions or increases in government spending were shown to the subjects, and they were asked which they would consider preferable (Appended Note 2-2). In this methodology, government spending was divided into the following categories: i) social security benefits including pensions, medical care and nursing care; ii) public services such as education, defense and police; and iii) public works such as roads, disaster prevention facilities and park construction. Then, policy options consisting of different amounts of reductions or increases under each category of spending were presented. For example, in one choice countering the proposal to maintain existing policy, the level of social security benefits would be maintained as is under the current existing system, but general public services would be reduced by 30% and public works by 20%. This combination of spending cuts constituted a single policy proposal and was presented to respondents for selection. The potential national contribution rate that would be realized in 2025 through the policy proposal selected by the respondents was shown within each option, and respondents selected the preferred option after considering the details of the spending reduction proposal and the contribution ratio realized thereby.

 Results of estimate of utility functions
    Using the individual questionnaires, the utility function of the respondents concerning the potential national contribution rate and the various spending categories was estimated (Table 2-1-11). The results indicated that a significant positive coefficient for social security benefits, implying that increases in social security benefits could work to improve the utility level (satisfaction) of respondents. With respect to public works, however, a significant negative coefficent was found, and thus reductions in this expenditure tended to increase respondents' utility. With regard to general public services such as police and defense, the coefficent did not differ significantly from zero, indicating that increases or reductions in general public spending do not have a major effect on utility. The results also showed that if the potential national contribution rate is increased, the utility of respondents declines. In the questionnaire survey, the respondents selected one policy preference from four options, a process that was repeated eight times. However, all of the dummy variables relating to the order in which the options were presented were in the vicinity of zero, and thus there was no bias toward specific selections (e.g. there was no tendency to always choose the option at the top of the list). Presumably, then, the respondents carefully considered the details of the questions and gave their answers based on their own preferences.
Table 2-1-11 Results of estimate of utility functions

 Rate of willingness to pay for social security benefits
    On the basis of the estimated utility function, the "rate of willingness to pay" was calculated, that is, the percentage increase in national contribution rate that would be acceptable relative to a 1% increase in social security benefits. The average for all respondents was found to be 0.24% (Table 2-1-12). Technically speaking, this figure is based on an estimated utility function, and calculating the amount of increase in the potential national contribution rate needed only to negate exactly the increase in utility due to the 1% increase in social security benefits yielded a result of 0.24%. Interestingly, if the rate of willingness to pay of 0.24% indicated in this research is converted to value terms by multiplying by the national income amount, the resulting figure happens to correspond to almost 1% of social security benefits.(12) This means that, in the case where social security benefits and the burden are increased by the same amount, the increase in utility from the former offsets the decline in utility from the latter, and citizen's utility remains the same.
Table 2-1-12 Rate of willingness to pay for social security benefits
    It should be noted, however, that the estimated result of the rate of willingness to pay above is the average of all respondents and that large differences appear if the estimate is made according to age group. To be specific, the rate of willingness to pay of people in their 20s is rather low at 0.15%, while for people 60 years and older who are already receiving pensions or other social security benefits (or who will receive these benefits shortly) the rate is high at 0.34%. Presumably, this indicates that for the younger generation, for which the future social security burden will be high, the acceptable burden is correspondingly low. This suggests that it is important that provisions be made to account for the difference between generations regarding benefits and burden in the design of the social security system. In the medium-range age group, the rate of willingness to pay is midway between that of people in their 20s and those in their 60s. However, the acceptable burden of people in their 50s is relatively low. This can be explained by looking at a classification by life stage. In households in which the eldest son is a junior high school or high school student, the rate of willingness to pay is low because there is heavy burden of education expenses. Thus, the low acceptable burden of people in their 50s may reflect the fact that this age group heads most households that are in the final stage of child-rearing. In addition, an analysis by municipality size reveals that the rate of willingness to pay of people who live in large metropolitan areas is high compared with those that live in medium or small municipalities, which probably reflects the fact that the income level in large metropolitan areas is relatively high.

 Preference concerning public works
    As described previously, a reduction in public works results in an increase in the utility of respondents. However, an analysis by municipality size shows that this relationship is stronger with people living in large metropolitan areas than with people living in medium or small municipalities. Evidence of interregional differences was also found. Generally, in regions whose per-capita public works expenses are low, the increase in utility due to public works reductions appears to be large (Figure 2-1-13).
Figure 2-1-13 Public works: Utility by municipality size, per-capita public works expenses and utility

 Simulation of government support rate
    Next, a simulation using the estimated utility function parameters was performed to estimate the postulated differences in the support rate between the alternative policy options (i.e. the relative difference in utility obtained from the various policies). In the base scenario, the national contribution rate in 2025 increases to around 56% due to the growth in social security benefits expenses assumed under the present system, even if other spending relative to GDP levels off under current conditions (Policy Proposal 3: Case of expansion of spending and burden). As alternative policy proposals to this, two proposals for holding down national contribution rate to the government's target of around 50% by 2025 were considered. Specifically, these included a proposal to hold the contribution ratio to 50% through reductions in social security benefits compared with the base scenario (Policy Proposal 1), and a proposal to maintain the contribution ratio at 50% by reducing both social security benefits and public works projects in comparison to the base scenario (Policy Proposal 2). Calculation of the theoretical value of the support rate of respondents relating to these three options indicates that Policy Proposal 2 (reductions in both social security and public works projects) will receive the highest support (Table 2-1-14). This is because, even though a reduction in social security benefits results in a decline in utility, a reduction in public works projects and a decline in the national contribution rate increases utility. With respect to Policy Proposal 1, in which only social security benefits are reduced, the rise in utility through a decline in the contribution rate and the fall in utility due to a reduction in social security benefits are nearly equivalent, and for this reason, Policy Proposal 3 (expansion of spending and burden) receives almost the same support rate. In addition, differences in the support rate relating to the three policy proposals emerged if the respondents were divided by attributes. These differences are described below.
Table 2-1-14 Simulation of support rate for policy proposals to control potential national contribution rate
(i) In the case of both men and women, the support rate was highest for Policy Proposal 2 (reduction in both social security and public works projects). In the case of women, however, the support rate was higher for Policy Proposal 3 (expansion of both spending and burden) than for Policy Proposal 1 (reduction of social security alone). This reflects the fact that for women, the increase in utility due to an increase in social security benefits is higher than for men.
(ii) A breakdown by age group reveals that the support rate for Policy Proposal 2 (reduction in both social security and public works projects) is high regardless of age group, but for people in their 20s, the support rate for Policy Proposal 1 (reduction of social security alone) is higher than for Policy Proposal 3 (expansion of both spending and burden). This is because, as mentioned above, for people in their 20s, the rate of willingness to pay for social security benefits is low, and for this reason the increase in utility due to a decline in the national contribution rate is larger than the decline in utility due to a reduction in social security benefits. Conversely, for people in their 60s, the support rate for Policy Proposal 3 (expansion of both spending and burden) is by far higher than the support rate for Policy Proposal 1 (reduction of social security alone). An analysis by life stage indicates that the support rate for Policy Proposal 2 (reduction in both social security and public works projects) is high regardless of life stage, but in the period when child-rearing expenses are comparatively high, the support rate for Policy Proposal 3 (expansion of both spending and burden) is low, while the support rate for Policy Proposal 2 tends to be high.
(iii) As for differences relating to size of municipality, the support rate for Policy Proposal 2 (reduction in both social security and public works projects) and for Policy Proposal 1 (reduction of social security alone) are, respectively, higher and lower among people living in large metropolitan areas than among people living in medium and small municipalities. This is because in large metropolitan areas, the increase in utility due to a reduction in public works projects is large, as is the decrease in utility due to reductions in social security benefits. Looking at interregional differences, the support rate for Policy Proposal 2 (reduction in both social security and public works projects) in Hokkaido and Tohoku is less than 50% because in both regions the degree of increase in utility due to reductions in public works projects is low, while the decline in utility due to reductions in social security benefits is large. In other regions, the support rate for Policy Proposal 2 (reduction in both social security and public works projects) is over 50%.

 Summary of analysis results
    The following is a summarization of the research results and the analysis on which they are based.
    First, the result clearly indicated that for benefits such as social security where there is a clear return to individuals, people have some degree of willingness to pay, but do not have a corresponding ready willingness to pay for government spending that brings no obvious benefit. In addition, reductions in those government expenditures that people do not consider urgently necessary in raising their utility. This means that in order to obtain the understanding of citizens, efforts must be made to certify that the nature of the expenditures is truly necessary for citizens. It also highlights the need for flexibility to take account of that which the citizens regard as necessary and that which they do not.
    However, in the present context where government spending is leading to major deficits, the question as to whether or not each person is willing to pay and whether or not government spending should be increased are separate issues.
    Second, the above results indicate that the desirable level of the national contribution could considerably differ, depending on the specifics of government spending. For the same potential national contribution rate, where the percentage of spending that brings direct benefits to citizens is high and the percentage of spending that does not is low, citizens' utility was shown to be high. Therefore, lowering citizens' national contribution rate by reducing government spending whose necessity is low could substantially improve citizens' utility. However, the results of this analysis do not provide guidance as to what absolute level of potential national contribution rate would be associated with the highest level of citizens' utility. The reason is that if an increase in the amount of social security benefits is accompanied by the same amount of increase in the burden, the level of citizens' utility barely changes at all.(13) It should be noted, however, that in terms of different age levels, an increase in social security benefits and the accompanying increase in burden causes the utility level of younger age groups to decline substantially.
    Third, the national contribution rate varies considerably depending on life stage in terms of age and family circumstances such as the educational stage of children. Consequently, to obtain broad citizen support when promoting fiscal structural reforms, consideration must be given to variables such as intergenerational differences and educational expense burden. In addition, the finding that the rate of willingness to pay for social security is high in the upper age group probably will facilitate understanding of the significance of sharing the social security burden within the same generation of elderly.
    As a final note, the above analysis results should be approached allowing a certain amount of leeway because response results may have been affected by how questions were posed and how they were explained.(14)


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