Selling Government Assets Not a Cure

Kazuhito IKEO (Professor, Keio University)

Even if primary balance of the budget can be achieved and the increase in public borrowing in terms of GDP can be halted, Japan's public debt is eventually expected to reach around 200% of GDP. Such a level is clearly too high to be sustainable for a long period of time. The necessity of reducing the volume of the debt itself, in addition to achieving primary balance, is gaining awareness.

There are essentially only two ways to reduce public debt. One is to repay the debt by using budget surplus acquired through tax increases and expense reductions. The other way is by selling government-owned assets. Because tax hikes and spending cuts are always unpopular and deemed difficult to implement, the idea of selling government assets is attracting attention. The question then is whether the sales of the assets would be sufficient to reduce public debt to reasonable levels.

Some people believe that Japan's budget deficit is not serious because the government also has a large balance of assets. If this were true, it would be possible to reduce the volume of public debt significantly by selling government-owned assets. But in reality, it seems the volume of assets that can be sold and used to repay the debts is very small.

On March 23, the Asset Compression Project Team of the Budget Reform Study Group in the ruling Liberal Democratic Party publicized an interim report that proposes reducing government assets by 112 trillion yen. But what the report proposes is merely to transform 100 trillion yen worth of assets into off-balance-sheet items by securitizing the respective assets, that is, transferring them to special purpose companies that are not consolidated to the government's budget. Such transfer of assets could obviously not result in reduction of debts in real terms. Therefore, let us further consider the remaining 12 trillion yen asset reduction proposed in the report.

Japan's government is involved in various types of financial intermediary activities that inflate both asset and liability sides of the balance sheet. There may be a number of cases where it is desirable to reduce such figures bloating the government's balance sheet. But the fundamental issue here is not about the figures caused by intermediary activities, but rather reduction of real debts accumulated through years of budget deficits.

For example, even if the loan assets hold by "the Fiscal Loan Fund Special Account" worth 275 trillion yen were to become available for sale, proceeds thus obtained must be used to repay the deposits made by the postal savings fund and so on, and to redeem respective investment-and-loan bonds. It means the money could not be transferred to the general budget account, and therefore it could not be used to repay ordinary bonds issued to cover budget deficits.

Sales of fixed properties such as selling of government office buildings, as many banks have done in the past to overcome bad-asset calamities, may have the psychological effect of promoting a sense of crisis, but the effect on debt-reduction can not be significant. This is because if such office buildings were to be continuously used by the government, the total lease payments to be made, discounted to present value, would match the sales price.

Under such circumstances, the volume of assets of which sales proceeds could be used to reduce the existing debt should be estimated as being only about 12 trillion yen. Compared against the outstanding balance of ordinary government bond of 526 trillion yen, 12 trillion seems rather minuscule. In other words, we must be gravely aware that the budget deficit is a threatening issue not only in terms of gross size but also in terms of net volume.

(The original Japanese article appeared in the April 22, 2006 issue of Weekly Toyo Keizai)