Is the Ministry of Finance Too Focused on Fiscal Balance?

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As criticism of Japan's Ministry of Finance (MOF) mounts, the term Zaimu Shinrikyo (Ministry of Finance Cult) has gained traction. Protests demanding tax cuts and even the dismantling of the ministry have been reported. However, it is doubtful that such demonstrations can lead to better fiscal policies. Instead, let's consider the broader picture of Japan's fiscal debate.

For years, there has been a divide between "Fiscal Balance Advocates" and "Proactive Fiscal Policy Advocates." While the former prioritizes budget balance, the latter argues for flexible fiscal stimulus during downturns. When economic setbacks such as consumption tax hikes derail economic recovery, it is clear the MOF has leaned too far forward toward "Fiscal Balance." MOF has repeatedly warned of a looming fiscal crisis and is now beginning to sound like the boy who cried wolf.

No Demand for Government Efficiency

Beyond the debate over fiscal balance, there is another dimension — the size of government. Traditionally, conservatives favor small government, while left-leaning forces advocate big government. Donald Trump's administration, for example, is pursuing tax cuts along with government efficiency measures, aligning with the small-government philosophy.

Meanwhile, Japan's MOF is enthusiastic about balancing the budget through tax hikes but much less so about cutting expenditures. While it outwardly advocates spending cuts, in reality, it ultimately yields to political demands, using this tactic to allocate budgets and gain influence over politicians and interest groups. This process is the core of the MOF's power.

Japan's real issue is the lack of voices advocating for government efficiency. Both ruling and opposition parties tend to pursue spending that pleases their voter base. The MOF's stance is best described as expansionary balance — continuously increasing the budget despite Japan's GDP remaining flat over the past 30 years.

Hidden Tax Burden

That said, a simplistic small government argument no longer applies today. Japan must increase its defense spending. And rising healthcare costs due to an aging population are inevitable. But if the budget keeps expanding without restraint, what will happen? Unless we fully embrace a limitless fiscal policy that disregards balanced budgets altogether, tax hikes are inevitable.

Japan has already undergone massive stealth tax hikes, primarily through social insurance premiums. The government's social insurance revenue as a percentage of GDP has nearly doubled from 7% in 1990 to 13% in 2022.

Meanwhile, personal income tax revenue, which was 8% of GDP, dropped significantly and only recently returned to 7% as incomes slightly rose. Rather than direct tax increases, which tend to provoke public backlash, the government has relied on these stealth tax hikes.

As a result, most people now pay more in social insurance premiums than in income and resident taxes. Since these premiums are regressive, lower-income earners bear a heavier burden. Only salaried workers earning over ¥17.5 million JPY (approximately $117,000 USD) annually pay more in taxes than in social insurance premiums, including employer contributions.

Considering this, those calling for tax cuts in front of the MOF may actually be tightening the noose around their own necks. Instead, they should be demanding government efficiency.