Policy Research Institute

Table of Contents : Current Issues

Vol. 103 : New Developments in Public Finance Law

Summary of Articles: Current Issues

Toward an Interdisciplinary Study on Public Finance Institutions - A Legal Scholar’s Perspective

By Takeshi FUJITANI (Associate Professor, Hokkaido University School of Law)


Economics and legal scholarship are two major disciplines that share significant scholarly interest in the study of the public finance institutions. However, intellectual exchanges between these two disciplines have been surprisingly scarce. This paper identifies the causes for such intellectual paucity, and calls for more active and fruitful interdisciplinary studies on the institutions of public finance.

It is often the case that the first step for any meaningful interdisciplinary dialogue is to recognize the fundamental discrepancies in focuses, issues, and goals between disciplines. And it is certainly the case in the present context.

First and foremost, it should be noted that the legal studies on public finance, which has been recognized as a branch of the public law, focuses on the legal relationships between legal entities, i.e., the state and private parties. On the contrary, economics predominantly centers the market in its analysis and considers government interventions in terms of its impact on the market mechanism. Such discrepancies in focuses often (and perhaps quite reasonably) nurture mutual indifference on both sides. Nevertheless, this paper contends that such discrepancies indeed provide a great opportunity (at least) for the legal scholarship to revisit its premise and to broaden its scope of analysis. For example, economic analysis of the incentive structures of various agencies within the formal institutions of public finance (e.g., budget process) will help the legal scholarship with incorporating the institutional design perspective. Simultaneously, it would help legal scholarship revisiting and reconfirming the significance of its core function - legal doctrinal analysis, in the broader policy design context.

Secondly, economic approaches (particularly game theoretic ones), could potentially help the legal scholarship broaden the concept of public finance “institutions.” The legal scholarship might be able to go beyond its exclusive focus on the written laws and capture the public finance as the equilibrium of various dynamic factors, including “soft laws.” These emerging perspectives will be particularly helpful when the legal scholarship on the public finance seeks to address those issues which legal analysis has been constrained due to its methodological myopia. The law of public debt market is one of such examples.

Thirdly, the recent development of epistemic game theory might shed a new light on the role of legal discourse in the field of public finance law, which is arguably driven by political force than by the law itself. When it comes to the policy question of public finance, arguably the law has only marginal and auxiliary roles. One of the fundamental aporiae for the public finance law is how to discipline the democratic legislature, the decision-making body of public finance. Such agenda should sound almost self-defeating because the legislature can change the law at will. Yet it might be the case that the law is neither the exogenous dictator of the political process nor the mere outcome of the political process; it might serve as an integral part of dynamic institutional evolution. The legal scholarship might be able to identify the conditions and mechanism under which the law can contribute to the fiscal discipline.

Though preliminarily, this paper indicates several potential directions for the further development of the legal scholarship on the public finance, and suggests how the intellectual exchanges with economics will be helpful for that purpose.

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Fiscal Risks, Time Frame, and Public Finance Law - Problems of Government Loan Guarantees

By Hiroyuki KOHYAMA (Associate Professor, Graduate School of Humanities and Social Sciences(Law), Okayama University)


This paper considers the issues on the risk-taking by the government (government loan guarantees, for example). Japanese public finance law and Constitution adopt a single-year budget process on cash basis. Cash-basis budgeting has several advantages for the control of cash flows. However, the Japanese budget system does not take into account all costs of government activities.

The public finance law imposes control on “explicit contingent liabilities” such as government loan guarantees only in terms of total amount of loan guarantees. Yet under the Japanese public finance law, where a cash basis single-year budget is adopted, policymakers and the people cannot accurately recognize the costs of contingent liabilities. Unlike direct loans with cash disbursements, costs of loan guarantees will not be counted as expenditures until it incurs cash disbursement. Thus, there is a bias in favor of loan guarantees.

In this respect, the current public finance law has been structured to give rise to non-neutral effects on the decisions of policymaking instruments. This represents a distortion of budget system in the context of the selection between loan guarantees and direct loans. This issue closely relates to the more fundamental issue of government risk-taking.

In this paper, the main stress falls on the control of government loan guarantees. This paper explores approaches to control the explicit contingent liabilities of the government in the budget process from the perspectives both of cash flow and stock. I also categorize the risk control approaches of various foreign jurisdictions for the budget processes and examine an “accrual budgeting” as an approach to enhance the budget control while maintaining a single-year time frame.

Accrual budgeting would face difficulties in expectation and valuation. These and various other difficulties may rule out full adoption. Yet by incorporating accrual budgeting as supplements to the cash-basis budgeting, we would achieve enhanced neutrality and transparency of budget system.

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Transfer Payments and Taxes - Perspectives of Net against Gross

By Satoshi WATANABE (Professor, School of International and Public Policy, Hitotsubashi University)


This paper focuses on transfer payments of public finance expenditures and attempts to form a basic judgment on whether the transfer payments and taxes should be considered on a net basis or gross basis. When considering them on a net basis, transfer payments and taxes can be assumed to have a plus-and-minus relationship in the context of the interrelationship between public finance and the national economy. On the other hand, we should consider them on a gross basis when we look into their separate roles and functions. In terms of the income redistribution function of public finance, the net effects in off-setting taxes and transfer payments (i.e., social security benefits) are important, while the gross basis is somewhat less substantive. This may be a general economic notion. Yet the actual public finance system must actually be operated, considering, to some extent, the incentives of people and incomplete information. Thus, the development of an adequate system based on public finance law and tax law is inevitable. In this case, transfer payments are not always set off by taxes as a plus-minus item. We should look more deeply into the information that gives rise to the gross cash flow (or the information related to cash flow). Economic tools are useful for understanding the basic issues surrounding the problems of information and incentives. The choice between a net perspective and a gross perspective should be adequately determined according to the policy challenges at stake. The analysis of issues related to public finance policies generally requires compound approaches from the perspectives of economics and jurisprudence.

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Public Finance and Legal Framework - Legal Framework to Ensure Public Finance Discipline and Fiscal Policy

By Kazuyuki SUGIMOTO (Professor, Graduate School of Public Policy, University of Tokyo)


Public finance in Japan faces challenges more serious than ever before. One of the most compelling and urgent goals is to ensure public finance discipline. This paper makes insights into the framework and operations used to ensure public finance discipline.

Legal framework under public finance law

–  The rule concerning the construction bonds and deficit-covering bonds under Article 4 of the Public Finance Law embodies the significant notion that future generations are not to bear any burdens in excess of benefits. Yet nowadays, when the issuance of special deficit financing bonds in large amounts has come to be common , we are far from living up to this rule. Japan therefore needs to develop legislation to achieve short-term objectives such as elimination of primary balance deficits and reductions in outstanding government bonds and securities as a percentage of GDP.

–  The rule to prevent central banks from underwriting government bonds and securities, such as that prescribed in Article 5 of Japan’s Public Finance Law, is standard to advanced economies, and the principle behind it should be observed going forward. Yet it also seems necessary, in economic policy, to ensure operations to supply money through buybacks of government bonds on markets.

Experiences with the Law on Reform of the Public Finance Structure

–  In 1997, the Law on Reform of the Public Finance Structure was enacted with a view to promptly improving public finance. The phasing out of special deficit financing bonds was adopted as a means of strengthening public finance dicipline, and a “capped” ceiling was set on the disbursement of the main expenditures.

–  According to some thoughts, the Cabinet decision might be sufficient for the policy of public finance operations. However,it was significantly important to enact a new law and clarify the purport of the parliament. This was the first decision of its type in Japan.

–  The “Basic Policy 2006,” a policy statement of the public finance operation policy decided in 2006, was determined at the Cabinet level.

–  In enacting the Law On Reform of Public Finance Structure, Japan resolved to set a new law prescribing quantitative curtailment targets for major expenditures over multiple years and to achieve consistency with the single-year budget principle, the Cabinet’s right to compile budgets, and related legal issues.

–  When Japan’s economy receded in the wake of Asian currency crisis and the crisis of Japanese financial institutions, the Law was amended,frozen,andultimately discontinued, in 1998.

Legislation on strengthening of public finance discipline overseas

–  Major coutries have implemented legislative measures toward rebuilding public finance dicipline, including amendments to their constitutions.

–  Germany set a goal for public finance discipline through the amendments to its constitution.

–  France is now considering various approaches to public finance dicipline including possible amendments to its constitution.

–  England enacted a law concerning rebuilding public finance.

–  The EU has prescribed government deficit as a maximum percentage of GDP under the “Stability and Growth Pact.”

–  The US enacted “OBRA 90” and “OBRA 93” in 1990 and in 1993, and these have had significant effects in improuving public finance. The US also recently enacted the “Pay-As-You-Go Act of 2010.”

Assurance of public finance discipline, and the legal framework

–  Taking into consideration the asymmetry between the relaxing and tightening of fiscal policy, the one being easy and the other difficult, public finance discipline should be sustained by setting a target with a strong political will. A political commitment is a significant step towards the legislation. These efforts are all the more necessary, now that a change in the ruling government party may be occurred ahead.

–  The provisions of Articles 4 and 5 of the Public Finance Law are not effective goal toward rebuilding of public finance discipline for the time being. An important political challenge will be to deliberate legislation prescribing basic policies for public finance by defining the goals for its dicipline. The law, however, must be enacted flexibly to accommodate rapid changes in economic conditions.

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Response to State Fiscal Crisis - Drawing on Experiences in International Finance

By Masatsugu ASAKAWA (Deputy Vice Minister of Finance for International Affairs, Ministry of Finance)


What primarily does the “failure of nation” mean? Although it ultimately means the denial or abandonment of public debts, practically, any failure to repay on a due date might eventually lead to an official debt restructuring arrangement such as a deferral, or reduction of principal and interest payments.

In international finance, the State Debt Restructuring Mechanism (SDRM) was once discussed at the IMF in the early 2000s. This was a mechanism to restructure national debts through a legal framework. No clear conclusions, however, were reached. In this paper I first summarize the discussion held at that time. Then I discuss the functions and roles of the Paris Club, an official body responsible for the restructuring of public debt. I then overview the functions of the IMF and its development, the central player in addressing balance of payment crisis in individual countries, while highlighting the economic crisis in Mexico (Tequila Crisis) in 1995, the Asian currency crisis in 1997, and the global financial crisis subsequent to the Lehman Shock in 2008. Next, I discuss the financial cooperation in East Asia, an effort that has been enhanced since the early 2000s, finally followed by an analysis of the economic implications of the currency union by referring to the Greek Crisis in 2009.

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Grasping Tax Transfers in Budget Process - Lessons from New Framework of the Tax Expenditure Budget in the United States

By Masao YOSHIMURA (Associate Professor, International Graduate School of Social Sciences, Yokohama National University)


As interest grows in redistributive function of income taxes, more are arguing for a tighter integration and more comprehensive grasp of taxes and government grants. When we focus on the meaning and necessity of an integrated grasp of the revenue side and expenditure side from the viewpoint of redistribution through income tax or social security system, we should consider how to incorporate such an (integrated) grasp into the budget process. Traditionally, those who insist to introduce tax expenditure budget in Japan, have emphasized that it is necessary to control the costs of tax preferences. Can we apply this argument to a control of tax transfers in the budget process?

Japan’s tax expenditure arguments will be presented in Chapter II and it is shown thant such arguments have focused on tax preferences. Next, I discuss how the US incorporated the costs of tax transfers into its budget process when reforming its framework of tax expenditures. I will present a summary of the report issued in 2008 by the Joint Committee on Taxation in the US and give an overview of the new proposed framework.

The new framework proposed by the Joint Committee on Taxation break down the functions of traditional tax expenditure theory into its control function and baseline function in tax reform. This effort designs the tax expenditure budget with a simplified objective of expenditure control and strives to develop more functional categories. “Tax-induced structural distortions” are separated from “tax subsidies” from the perspective of expenditure control, and it is reasonable that the tax subsidies are further sub-categorized into “tax transfers”, “social spending”, and “business synthetic spending”.

While the concept of tax transfers is defined functionally, they do not address personal deductions or tax exemptions, which are two important provisions when considering the costs of tax transfers. I think it is because a evaluation of these provisions should be related to the determination of the tax rate structure and such evalustion is not included in the concept of tax expenditure from the perspective of the traditional objective as expenditure control.

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Insight into the Application of Transfer-Price-Dispute-Solution Approach as a Measure to Ensure the Reliability of Calculations on Future Expectations for Breakout from Stagnant Conditions in Pension Public Finance

By Akiyuki ASATSUMA (Associate Professor, College of Law and Politics, Department of International Business Law, Rikkyo University)


Our objective for this paper is to yield insights into approaches that make reliable calculations on future expectations, including pensions, as a part of improving bases for discussions. We focus somewhat less on direct prescriptions for addressing social security issues (including pensions) for the elderly.

Under the current democratic political regime, there has been a strong focus on consideration of the elderly. Meanwhile, the elderly themselves are less focused on fiscal consolidation than the young. It may seem counterintuitive to hear that the elderly are less concerned, given that a fiscal failure will reap far more suffering on an older person than a younger one. The elderly might elect to prefer riskier schemes that return more substantial benefits, such as pensions under social security programs, rather than curtailing their benefits to safeguard their holdings through fiscal consolidation (including higher consumption taxes). This reflects the relatively optimistic confidence of the elderly that no fiscal failures loom on the horizon.

The government’s calculations on future expectations, including those applied to pension public finance, are unduly optimistic. Government officials (politicians as well as bureaucrats) are incentivized to patchwork the calculations on future expectations on a short-time basis. And to the extent that they do, they are less inclined to pursue serious system reforms, such as pension reforms, by sounding alarm bells on harsh future expectations. Ethical criticisms alone are unlikely to correct or improve this situation. And even if professionals and academics strive to review the public finance conditions sincerely, through sophisticated approaches, such efforts alone will not give rise to the trust of the national people. To alert the national people to the gravity of public finance conditions (including pensions), it will be critical to calculate future expectations more reliably by designing an incentive mechanism that gives no impression of position pitches.

This paper delves into the application of the so-called baseball approach as a measure to ensure the reliability of calculations on future expectations. The baseball approach is a scheme for setting the annual compensation for baseball players: the players demand higher compensations, the team owner demands lower compensation, and a third party selects. This approach is expected to serve well in solving transfer price disputes and approximating the demands of counterparties. This approach, we argue, can be applied to the public finance conditions surrounding pensions by interjecting pessimistic calculations on future expectations to counterbalance rosy and less sincere calculations, and then judging which is more precise and adequate. Regrettably for soundness of public finance (including pensions), there are no ultimate interested parties analogous to the team owner determined to pay his players less. To compensate for this missing element, we may need to artificially create situations in which those preferring optimistic calculations and those preferring pessimistic calculations for the future expectations of public finance are mixed.

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Public Finance Law and the Constitution and Private Law - The Legal Control of Public Finance

By Minoru NAKAZATO (Professor, University of Tokyo Graduate Schools for Law and Politic)


The objective of this paper is to clarify both the basic structure of public finance law and the proper legal control of public finance. It explains the basic theoretical structure of that control while noting its relationship to the Constitution and private law. For this purpose, I highlight the history of public finance in France since the medieval era. In particular, I note the establishment of the concept of sovereignty and how it developed independently of private law. Ultimately, it replaced the system of domanial rights of the fürst and the monarchs under the feudalistic systems rooted in private law. Domanial rights of the fürst and monarchs, a medieval feudalistic system based on private law, was altered by the adoption of the concept of sovereignty. The concept of the nation was thus created under absolutist terms, supported by the sovereignty concept. Yet some areas of public law now in place retain remnants of the earlier private law. Thus, the legal basis of public finance inevitably fuses public and private law to some degree. Underlying this paper is a basic recognition of the need to consider and develop legal control in response to these characteristics. More specifically, this paper basically argues that the legal control mechanism for public finance should have two aspects. First, public finance law must rely on the procedural laws in relation to control over the state, both constitutionally and from a public finance perspective. Second, public finance law must rely on substantive laws basically dependent on private laws in the context of the relationship between the state and its citizens.

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Currents of the Legal Studies on the Federal Budget Process in the United States

By Keigo FUCHI (Professor of Law, Gakushuin University, School of Law)


Legal scholars in the United States have been publishing interesting papers on the federal budget process based on non-legal approaches. Although there is room for improvement in the papers and we have to be careful in deriving policy implications from them, their flexible thoughts are impressive. In contrast to the scholary discussion in Japan, they reflect recent trends in political philosophy, political science, and constitutional law. This paper outlines the United States federal budget process, describes several academic frameworks for analyzing legislative process including budget process and surveys latest papers on the federal budget process.

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Public Sector Accounting - An Interdisciplinary Field Involving Accounting, Economics,and Jurisprudence

By Ryosuke TAO (Lecturer, National Graduate Institute for Policy Studies)


Public sector accounting has recently been improved. There are now requirements to disclose stock information in addition to the flow information presented in budget statements or accounts statements. Public sector has prepared and disclosed their financial statements (including balance sheets and income statements) based on business accounting approaches. Moreover, as a matter of policy, the government tends to prepare and disclose cost information along with the financial statements for the individual ministries and governmental agencies.

The objectives of clarifying the fiscal conditions in a state through the preparation and disclosure of financial statements are to fulfill the state’s accountability to its citizenry and market participants and to optimize and enhance the efficiency of its fiscal activities. Most importantly, the improved information should contribute to democratic decisions on public finance.

A perspective different from the business accounting is that public sector accounting places more emphasis on inter-generational fairness. With respect to the inter-generational benefits and burdens, however, various factors must be considered, and the differences between assets and liabilities in the balance sheet may not be indicators for that purpose.

Public sector accounting is considered to have been developed based on the business accounting approach. As such, the objective of the accounting is to retrospectively review how assets and liabilities have changed as a result of past public finance operations. Yet, in considering compelling public finance conditions, there is a need to discuss and consider expected perspectives, in order to clarify what resources will remain in the future by incorporating the aspect of future cash flows (this paper views this as a mixture of accounting thought and economic thought). It is important to recognize that both perspectives are commingled. If the forecast perspective is highlighted, the assets in the balance sheet should include taxation rights that give rise to future tax revenue. Another useful practice, from the perspective of information disclosure, is to prepare an individual balance sheet, in addition to a comprehensive financial statement, for each significant political agenda (e.g., public pension obligations).

Public sector accounting has been developed without implementing a necessary legal basis. The effects of this reform may be a matter of not much interest without infringing any democratic control of public finance under cash basis accounting. The focus for public finance, however, has certainly been transferring from flow to stock and from the aspect of political decision to the aspect of administration. The role of public sector accounting should be clarified in conjunction with the various systems.

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Any article in the Review reflects the writer's own opinion, and has nothing to do with any statement issued by the Ministry of Finance or the Policy Research Institute.