Spending without Taxation: FILP and the Politics of Public Finance in Japan

By Gene Park | Go to book overview

ONE
Introduction

Everyone likes spending, although no one likes to pay. Governments are the same. While they would like to deliver popular goods and benefits to voters, paying for such spending requires unpleasant choices, levying taxes or running budget deficits. Because they cannot have high spending, low taxes, and balanced budgets, they have to make difficult political choices. Governments, thus, face a “fiscal trilemma.” But what would happen if a government found a means of spending without taxation? This book contends that this is precisely what Japan did. The ruling party, the Liberal Democratic Party (LDP), used a system of public finance that did not rely on taxes—the Fiscal Investment Loan Program (FILP)—and allowed it to do the seemingly impossible: keep taxes low and budgets balanced, all without having to restrain public spending. This combination was at the core of a distinctive postwar political bargain: one that eschewed high budget spending and taxation, expansion of the welfare state, and Keynesian-inspired fiscal stimulus. By doing so, though, it was striking a Faustian bargain that eventually undermined the political settlement that it helped underwrite.

By focusing on FILP, this study presents several novel findings. First, it demonstrates that a financial mechanism, FILP, enabled the Japanese government to run a distinctive neoclassical fiscal policy based on low budget spending from the end of the 1940s through 1970. This ran directly counter to the postwar trend in other industrial democracies, where governments increased budget spending and taxation to finance the expansion of the welfare state and in many cases employed fiscal stimulus to maintain full employment. Second, it shows that the government’s policy of budget restraint

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