Appended Note 3-2 Overview of Economic Growth Simulations
- Japanese version
- English version
1. Overview of macroeconomic model used in economic growth simulations
The simulation is based on the "social security model" developed by the Economic and Social Research Institute, Cabinet Office. It is a macroeconomic model expressly incorporating major social security systems, such as public pension, medical services, and long term care insurance, and is mainly designed to evaluate the overall effect of social security. However, we can also use it to simulate long-term economic growth by incorporating macro-economic sectors.
The model consists of three sectors: (1) macroeconomic sector, (2) labour supply sector, and (3) public finance
social security sector. It is a supply-side model based on the neoclassical economics maintaining that economic growth is determined by real factors, such as labour force population, capital accumulation trend, and technology growth rate. Labour force population is determined by population estimate, but it is also affected by the effect of a change of social security system on work incentives. Capital accumulation is basically determined by private-sector savings, but it is also affected by changes in social security system and tax system. Growth rate is independent of monetary factors, such as money supply, and inflation rate is affected by exogenous factors. The simulation period is until 2050.
For further details, see Masubuchi, Matsuya, Yoshida, Morito, A Study on Japan's Social Security System by a Macroeconomic Model Endogenizing It, Economic and Social Research Institute (ESRI) Discussion Paper No. 9, Cabinet Office.
2. Various assumptions for the simulation
We made the following assumptions, including the main exogenous variables, for conducting the simulation. Incidentally, the following policy assumptions were made by the Cabinet Office only for the purpose of conducting the simulation and they do not represent government policies.
(1) Baseline Case
- Future population: The median variant in the Population Projections for Japan (2002), National Institute of Population and Social Security Research
- Labour force participation rate by gender and age group: As for women and elderly men, the rate is determined by the model endogenously based on the economic environments and policy assumptions premised for the simulation. As for men in other age groups, we assume that labour force participation rate will remain constant at its fiscal 2001 level.
- Growth rate of total factor productivity: We assume productivity growth will remain constant at the rate (0.8%) estimated by the model based on up-to-date real data.
- Inflation rate: We use the provisional estimate made by the Cabinet Office as a reference material for deliberation of the "Reform and Perspectives FY2002 Revision." We assume the rate for and after fiscal 2010 will remain unchanged at the rate for fiscal 2010.
- Public finance of central and local governments: For the period of "Reform and Perspectives (revised edition)," we use the assumption made by the "Reform and Perspectives," and for the period after that, we assume that the size of public capital formation will grow in proportion to real GDP and that the size of government final consumption expenditure will move in line with nominal GDP growth rate that takes into account the growth rate of expenditures for social insurance benefits in kind. In addition, we assume that the adjustment of revenues necessary for maintaining the sustainability of public finance will be dealt with by endogenous changes of the consumption tax rate.
- Public pension: We assume that sustainability will be maintained by gradually raising the insurance premium (rate) in accordance with the standard case of the benefit level maintenance method proposed by the Ministry of Health, Labour and Welfare in its "Direction and Points of Contention concerning Pension Revision."
- Other social security: We assume the sustainability of other social security will also be maintained.
(2) Economic Vitalization Case
- Future population: Same as in the Baseline Case
- Labour force participation rate: We define actual labour force participation rate plus people wishing to work as "potential labour force participation rate" and assume that the rate will gradually increase toward fiscal 2050.
- Growth rate of total factor productivity: We assume that the average growth rate (1.4%) posted in the 1980s will remain unchanged.
- Others: Same as in the Baseline Case
Incidentally, we assume that the high estimate of the "Population Projections for Japan (2002)" will be realized in the case where the birthrate rises and that the low estimate will be realized in the case where the birthrate declines.