Discretionary deficit and its effects on Japanese economy

Abstract

This paper identifies the discretionary component of Japan's public deficits, which is included in the structural component in existing work. The identification is done by collecting data and information of stimulus packages. Discretionary expenditure, discretionary revenue, and cyclical revenue are the main factors of increases in public deficits in the 1990s. The revenue side has had greater impacts on deficits than expenditure. The effects of stimulus packages are examined, using the discretionary deficits. Stimulus policies have multiplier effects, while overall public deficits have not. Results of analyses indicate that: (1) stimulus packages have economic effects, (2) they also bring fiscal deficits, thus can be additional constraints on the government budget, (3) public deficits can be eased with GDP growth if tax is returned to the previous level, (4) the public finance has a structural deficit.

Acknowledgements

The author thanks Kazumi Asako, Takatoshi Ito for helpful comments. The author alone is responsible for any remaining errors. The author is supported by a JSPS Research Fellowship for Young Scientists.

Notes

¹ The ratio of general government long-term debt outstanding to GDP. The amount of national government debt was 518 trillion yen; that of local government was 199 trillion yen at the end of FY2003, and the total amount was 686 trillion yen with duplication of 32 trillion yen. (Source: Current Japanese Fiscal Conditions and Issues to be Considered, Ministry of Finance).

² See the note below Table 1 for estimation models.

³ GNP is used instead of GDP because government used to announce the forecast by GNP.

⁴ Other estimations of Asako et al. (1991) about fiscal policy have been conducted, and the results are also same when the sample includes 1990s.