Program Review: The First Step to Budgetary Reform
As part of the fiscal 2010 budget process, the Government Revitalization Unit, which was established under the Cabinet Office by the new Japanese government, implemented a program review to eliminate wasteful spending in ministries and agencies. The GRU asked private experts and ruling party politicians, rather than budget examiners in the Ministry of Finance, to examine about 450 public programs.
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They assessed the efficiency and effectiveness of various programs through intensive discussion with officials from relevant ministries. This was open to the public and broadcasted live via the Internet. The process of program review drew great public interest. Based on this experience, we must explore ways to further improve budgetary procedures.
Please see the end note for more information on the program review.
For the first time, a program review was carried out at the national level as part of the compilation of the government’s budget for fiscal 2010. This was a process to examine public spending done not by budget examiners but by private experts and politicians. What is most interesting is that the public could see the discussion between experts and officials from ministries and the final decisions by experts. Citizens were surprised to find that large amounts of tax revenue are being spent for programs whose performance is not clear. On the other hand, government ministries and agencies reportedly felt they were not afforded sufficient time to adequately explain their programs, and some even expressed anger at having programs unilaterally rejected. Some people have claimed the discussions were one-sided and disorderly. This was a first-time experiment implemented within a limited timeframe, and the review itself can undoubtedly be improved in some ways.
As one example of the findings of the program review, a certain foundation authorized by a relevant ministry has an approximately \1 billion budget, mostly from government funds. Until now, the public was not aware that the half of the total budget goes toward personnel expenses and other overhead costs. That foundation hired ex-officials who had previously worked in the relevant ministry; thus, it can be said that most of the public money put into the foundation was spent to maintain their daily living. This was brought to light as a result of the change of government.
The program review has generated a great deal of commentary and criticism. People are wondering about the authority of private experts and politicians who do not have a position in the government to examine public programs. Why can they cut or propose to cut public spending without delegation? Most of these objections, however, are based on misunderstandings. What matters most is not just cutting spending but realizing the problems of the budgeting system in Japan.
Information Asymmetry in Budget Negotiation
The first thing that struck me about the program review was the question of why there are so many wasteful programs—despite that fact that the Ministry of Finance assesses the annual budget, the Ministry of Internal Affairs and Communications evaluates programs, the Board of Audit and the National Diet’s Committee on Audit conduct ex-post evaluations, and many other bodies review budgets—and why so much tax revenue is spent so inefficiently. The private experts, who are mostly businesspeople or academics, do not have experience in reviewing spending and programs, but they can do it. How did the Finance Ministry and all the other government bodies involved in budgeting overlook so much questionable use of budgetary resources? It is indeed of great value to implement the assessment of programs in an open manner. In previous years political intervention in the budget process was common practice, and the annual budget process was not transparent. That is why so-called pork-barrel politics are prevailing in Japan. It is of course difficult to assess the outcomes of government-backed programs correctly, and thus it is political values that in the end decide the choice of programs. Nevertheless, the government should explain the efficiency and effectiveness of programs to the public.
Why are there so many wasteful programs? Generally speaking, guardians, who are budget examiners in the Finance Ministry, fail to cut spending in the process of budget negotiations with spenders. This is because spenders monopolize the information on programs needed to assess the funding, so the availability of information is asymmetrical. Normally, spenders do not tell the truth about the effectiveness of programs, simply because to be honest means the loss of budgets and resources. Spenders need not consider raising tax revenues; thus, their behavior is just to maximize their budget. The relationship between guardians and spenders is ambiguous and give-and-take. Therefore, traditional budget examinations and negotiations cannot eliminate wasteful programs.
The second issue is the information necessary for evaluation and assessment and the lack of incentives. At the program review session, government ministries and agencies sought to convince reviewers by explaining the necessity of their programs and budgets, based on program sheets explaining the purpose, background, and budget for each program. Their explanations, however, primarily consisted of reasons why the country must carry out the program—simply put, they were trying to creating a pretext. Most of the ministry officials argued that their programs are necessary because they are necessary for the country or public. When there is a fiscal surplus, large numbers of programs can be carried out, provided they serve the people’s needs. The issue is whether the nation should support such programs in the midst of severe fiscal conditions, as well as whether they are efficient and cost-effective. Reviewers told officials from ministries and agencies that they had studied programs in advance, and they did not simply arrive at their decisions of whether programs are to be maintained or not in one-hour meetings. The bureaucrats, however, generally failed to provide information on efficiency and cost-effectiveness.
Another criticism was that it is inappropriate to cut spending for education, research and development, and other such programs due to budget deficits—that the nation should invest public money for future generations. I do not disagree with that in general, but in a fiscal situation in which government debt is rising to 200% of gross domestic product, we have to consider carefully whether the cost of such programs should be passed on to future generations. Even if these programs are to be carried out, we must make every effort to achieve more efficiency. At all times, budgetary constraints determine the necessity of any given program, rather than the objective of programs. If the overall constraints are too tight, then the government should ask the public about the possibility of tax increases. It is often argued that public spending for education and health care service in terms of GDP is low in Japan compared to other developed countries. That is to be expected, since our taxes and contributions are among the lowest of any developed country.
In the private sector, cost effectiveness is critical for management. Why don’t public services care about it? That is because those who obtain more resources are praised as good officials, and their concern is the input of resources. Therefore little attention is paid to how those budgets are spent and what they achieve and produce. To put it extremely, virtually no information on cost effectiveness or the like exists. Ministries have had to evaluate their relevant policies or programs since the Public Policy Evaluations Act was enacted in Japan in 2001, but in reality this results only in printing documents as thick as telephone books. The Act does not work as expected. There also exists the problem of incentive compatibility. If programs’ performance was assessed as ”not good,” it might result in cutting budgets, so there is little incentive for government officials to provide accurate information for assessment. The management idea of getting feedback on results and using it to make improvements does not exist among government employees. It is no use to simply put more resources into a program, unless they are spent efficiently and effectively.
Political Leadership Must Be Here
What is needed most is political leadership. Legislators from the ruling party including parliamentary secretaries took part in the program review, but where were the relevant ministers themselves? They were instructed by the prime minister to act as ”internal finance ministers” before their budget requests for the next year, but in actuality there was little evidence that they assessed their budget requests seriously, and it can be said that they just authorized budget figures that bureaucrats made to maximize their available resources. By the middle of November a guideline for compiling the next budget had finally been worked out, but it seems too late to ask third-party experts to review programs and spending within such a short period of time. The cabinet members should share the sense of fiscal severity and prioritize programs in accordance with budgetary constraints. Before finding fault with the program review, should ministers and vice ministers take the initiative to assess their own budget requests?
Needless to say, the results of program review will not be automatically put into the next year’s budget. It is the cabinet that makes a budget, and thus the question of political leadership will be urgent. Well before the approaching end of the year, ministries, bureaus, and interest groups involved in programs that were assessed to be abolished by the program review had already begun lobbying against any such abolition. Political negotiation and decisions are needed for reducing spending as well as increasing spending. If there were no budgetary constraints, anything would be possible. However, to implement various programs to which the DPJ committed itself in the election manifesto without spoiling fiscal discipline, it is critical to reallocate resources in a “pay-as-you-go” way.
The program review has provided many lessons to us. It was done under severe time constraints in its year, but by evaluating the process itself, we can make the most of the experience for the next year’s effort. A program review is primarily done by ministries and agencies themselves as their own business. Ministers, with the help of outside experts, must exert their leadership in deciding priorities and reallocating resources in order to ensure that policies can be achieved. A ministerial committee will make a decision on politically important issues. The role of budget authorities is to clearly define the budgetary limitations and set rules of the game in order to enable resources to be redirected to the areas of highest priority. Unless efforts are made to stop the game of maximizing budget resources, streamline the budget process itself, and assess results and performances, wasteful budgets will not be eliminated. It is urgent to ensure efficient and effective implementation of budgets, including public procurement. For that purpose, it will be necessary to foster government employees with expertise in contracts and competitive tendering.
In conclusion, we have to proceed in reforming the budget system based on the first year’s program review. Without this reform, the vicious cycle will continue and wasteful programs will go on being reproduced. Since the 1980s, other developed nations have reformed their respective budget systems in a variety of ways in an effort to ensure fiscal discipline, but Japan has been left behind. International comparative research verifies the relationship between budget deficits and budget institutions or the budget process. Japan’s fiscal deficit, said to be the worst among all developed countries, is rooted in her budget institutions, such as lower transparency. Canada, which had struggled with deficits since the 1980s, underwent a change of government in 1993. The new administration reformed the national budget system, primarily through the introduction of a program review, and succeeded in fiscal consolidation. Government expenditures were drastically reduced, with some ministries and agencies cutting spending by as much as 20% or 30%.
Finally, I would like to present some proposals for more effective utilization of the program review. The process should be carried out before summer, which means “start before the preparation of the budget begins” so that we analyze and discuss various programs for structural reform, rather than just cutting spending. Subsequently, strict expenditure ceilings over several years should be placed on government ministries and agencies, and these bodies should tailor their budget requests based on government policies, using various reviews and assessments including a program review by external experts, an evaluation by the Board of Audit, and information from their own evaluations. The results of program reviews represent one type of value assessment, and others may be possible, but it should be noted that the reviews should be done by those who are knowledgeable about how programs are going on the “front lines.” If ministries and agencies do not follow the limitation guidelines, they must provide sufficiently persuasive rationales to convince experts, and offset spending with other cuts in order to maintain expenditure ceilings. When new programs are proposed, resources must be reallocated within the relevant ministry or agency budget. Provided they abide by expenditure ceilings (or baselines), ministries and agencies should be given some discretion to reallocate resources. Expenditure ceilings over several years will also mean a guarantee that ministries and agencies will be provided with resources as long as certain conditions are met. This is because conflicts between spenders and guardians on budget formulation will be eased and ministries will be able to pay attention to increasing program efficiency rather than maximizing their budget. Most importantly, ministers will perform the function of deciding budget priorities.
It will also be necessary to streamline various programs that are already included in budgets. When the same program is carried over from the year before with the same level of funding, little effort is made to improve its efficiency, and this is all the more true in light of the current deflationary economy. Efforts must be made to get ministries and agencies to produce consistent—or even better—results with less funding. But Japan’s problems will not be resolved by cutting spending alone. Despite the severe fiscal conditions, economic growth must be achieved and measures must be taken for the next generations.
Background information from the editor
How the program review ( jigyo shiwake ) was carried out
The public hearings to review various programs on the budgeting process were carried out by the Government Revitalization Unit, a new body formed under the Yukio Hatoyama cabinet that took power in September 2009. The GRU was established in order to reform the overall national administration, including the budget and system of national administration, from the people's standpoint, and also to review the division of roles among the national government, local public authorities, and private companies. The GRU’s first task was to examine budget requests from the perspective of their necessity and efficiency. It held budget-screening hearings to assess the need for around 450 publicly funded projects, out of the total of some 3,000 for which the ministries and agencies of the central bureaucracy had filed funding requests for fiscal 2010.
The program review process took part over nine working days from November 11 to 27, 2009, with three working groups handling the assessments and hearings. All the proceedings were open to the public and broadcasted live via the Internet. This process captivated the public interest: nearly 20,000 people came to watch these proceedings in person over the nine days they took place, and an additional 340,000 people viewed them online each day in real time.
The budget assessors ( shiwakenin ) included the DPJ’s Diet members, private-sector analysts and thinkers, and senior vice ministers and parliamentary secretaries for each ministry. They examined various programs by such criteria as necessity, urgency, and efficiency and announced their judgments based on working-group discussions.
The process of the program review of one item goes as follows:
• Officials from relevant ministries and agencies describe their program in 5–7 minutes
• Ministry of Finance Budget Bureau officials suggest issues and problems that appeared in the previous budget process in 3–5 minutes
• The DPJ’s Diet member heading the session defines an agenda and summarizes major issues to be discussed in around 2 minutes
• Debate takes place, with Q&A between assessors and ministry or agency officials, for around 40 minutes
• The DPJ’s Diet member heading the session concludes discussions and presents the final assessment in 2 minutes
Japan Initiative, a private think tank founded in 1997 by Hideki Kato (currently chairman of the Tokyo Foundation), has been recommending a program review in order to reform Japan’s administrative and fiscal systems. Hideki Kato, who still serves as Japan Initiative’s president, was tapped as a member of the GRU; he is now secretary-general of this new government body.