Managing Public Debt and Social Challenges

This first seminar in the 2011 series, Uncertain Futures: The Individual, Society and the State in the UK and Japan, explored the challenges facing Britain and Japan as government spending reviews address fiscal deficits and seek to determine priorities for the future. As the opening event of the series, this seminar looked ahead to some of the themes to be covered during the year from healthcare and education provision to work and pension arrangements, opportunities for youth and the burden of ageing societies. The speakers offered a comparative perspective on the financial, political and social considerations informing public policy debates in uncertain times.

Summary

The first speaker, Minister Yosuke Kawakami, began by stating that he was speaking in a solely personal capacity and that his comments didn’t necessarily reflect the views of the Japanese Embassy (in London), Government or Ministry of Finance.

Minister Kawakami compared the fiscal burden to a ticking time bomb or the Sword of Damocles. The gaping gap between expenditure and revenue has been widening he explained; indeed Japan’s debt, unlike the UK’s, has been accumulating over the past two decades. Despite a different time frame, the root cause of this debt in Japan and the UK is similar: a period of unsustainable expansion that quickly turned into a speculative bubble which burst, resulting in a huge hangover.

Kawakami remarked that expenditure in Japan has been rising over the last decades, particularly social security expenditure and grant-giving to fund social services. It is in this context that the UK coalition government’s fiscal consolidation and the characterisation of the ‘Big Society’ as a means of bidding farewell to the welfare state proves an interesting and pertinent case.

Kawakami went on to say that he hoped the UK would avoid a double-dip recession and stay the course, but suggested that if the economic situation failed to develop as expected, then the government would need a contingency plan to fall back on.

The Japanese syndrome – directed or driven by a rapidly ageing society – continued Kawakami, has resulted in deflation and psychological depression at a national level due to the trio of demographics, deficits and debts. While Japan is being criticised for looking inwards, it would appear that these difficult external problems can only be resolved through intelligent domestic debate. Moreover, according to Kawakami, individuals need to save more and the state needs to be bold and communicative with the public.

The current Japanese Prime Minister, Naoto Kan, has announced a broad agreement on tax reform and is declaring that consumption tax will rise. It remains to be seen whether his attempts will pay off and whether the Japanese public will grasp how important it is to accept necessary reform. Or, Kawakami posited, will Japan need another shock therapy to wake up to reality as occurred in the late 1980s? In any case, he concluded, future generations mustn’t be left burdened with this debt.

The second speaker, Frances Cairncross, began by acknowledging that Japan has been an important global economy for centuries and though much concern has been expressed at Japan having slipped from being the second largest world economy to the third, the position wasn’t really that dreadful.

The UK and Japan share the problems of massive debts and an ageing workforce, remarked Cairncross. They hold the highest total debt to GDP ratio amongst all the major developed and developing economies. Japan’s is, to a large extent, government debt whereas the UK’s debt pertains to financial institutions and households, reflecting each country’s different way of borrowing. Britain’s public debt has been growing at an astonishing rate and as cuts are not likely to remedy the situation, other measures need to be taken. Whereas Japan has largely borrowed from its own citizens, the UK has mainly borrowed from abroad she explained. Japan’s situation has been made worse by the problem of demography and Cairncross wondered what would happen when the elderly in Japan need to dip into the savings they’ve accumulated. While Japan’s is a crisis in ‘slow motion’ the UK’s is a potential Irish-style collapse.

Further elucidating the rapid pace at which Japan’s society is ageing, Cairncross stated that whereas it took 45 years (1930-1975) for the over-65s to move from 7% to 14% of the UK population and 69 years for the same process in the US – this progression took a mere 26 years in Japan (1970-1996) and will, ominously, also take 26 years (2000-2026) in China.

Cairncross went on to talk about solutions. Japan, she said, needs structural reform; i.e., a larger workforce, to check deflation and stimulate growth while the UK needs to improve the quality of its workforce, check inflation and cut public services. Britain also needs to enhance the quality of its health care service without spending more money and improve the quality of its education – the UK now comes equal or just below the OECD average in reading and maths.

Japan’s advantages and strengths, which shouldn’t be ignored, emphasised Cairncross, lie in its location in a region of rapid expansion containing the fastest growing markets and in its well-educated workforce and populace which is successful in quickly adopting new technology. Its handicaps, on the other hand, are a failure to use women properly and to the full. In terms of female directors as a percentage of the whole, Japan falls below Italy and Spain. Another problem is the hollowing out of industry and the fact that the work of a growing proportion of major companies such as Toshiba, Fuji Xerox and Yamaha Motor, to name a few, is being undertaken outside Japan.

According to Cairncross, the biggest challenge, however, is the demoralisation of the young. A declining number are keen to establish their own companies while a rising number want to remain with the same company for life, suggesting a lack of imagination or creativity. There has been much concern over the significant drop in Japanese youth studying abroad. While company-cutbacks mean they can no longer afford to send students abroad, those keen to gain overseas experience would manage the funds somehow, in the way that Chinese and Indian families club together to send their offspring to universities overseas.

Cairncross concluded by recognising the value of the intelligent young who are a country’s single most important resource. Referring to UK students, she maintained that their being optimistic will lead to a healthy society whereas their not wanting to leave home or go abroad would be problematic.

In concluding, the Chair, Professor Webley, thanked the speakers for their thought-provoking, strong and provocative talks.

The lively questions and comments following the talks covered a range of issues including the intergenerational aspect of debt and the burden the young will face in sustaining the elderly population, the fact that women in Japan are postponing having children even in the case where they are not in an exciting or great job, the idea of creating a highly competitive system of scholarships to encourage young Japanese to study abroad in lavish style, exporting the idea of the Big Society to Japan to fill the gap which the government can no longer fill or, conversely, promoting a private enterprise society instead, debate over the negative as well as positive attributes of debts, whether a country’s defaulting on debt is a viable option, the fact that Japanese companies are facing stiff competition from Korea, the fact that while Japan has invented a lot of new technology it needs to be inventive with it and the fact that there is no internationally constituted Japanese company even though Japanese companies operate abroad as Japan seems to be going at it alone.

Click here for Minister Kawakami Presentation

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