Japan’s free preschool education plan requires a fiscal balancing act

Education is a process that needs both long-term commitment and investment. So the government’s move toward making preschool education free must sound attractive to many.

Prime Minister Shinzo Abe views stepped-up investment in citizens as key to unlocking the country’s economic potential. But there is a catch: With debt twice the size of gross domestic product, the aging nation needs to find ways to fund the proposed initiative amid ballooning social security costs.

Economists believe shifting the country’s focus from the elderly to children is the right course of action, but some critics say politicians tend to cater to the needs of the elderly, who will vote for political parties that promise to maintain social welfare.

At the same time, the hope is that improving support for parents will turn the tide of the declining birthrate and shrinking population.

“It is often the concern about the future financial burden that discourages those in their 20s and 30s from having children,” said Takuya Hoshino, an economist at the Dai-ichi Life Research Institute. “So the government contributing to educational expenses would be a good step forward.”

He added: “That said, what is important is how the money is spent. Is it going to help boost the country’s economic growth over the longer run?”

On Friday, the government approved policy guidelines stating that a decision should be made by the end of the year on how to secure a source of sufficient funding to realize free preschool education.

The idea came after government officials and lawmakers stressed the need to address the country’s shrinking population, and the dampening effect the demographic change has on economic activity.

Recent health ministry figures show that the number of babies born in Japan fell below 1 million for the first time in 2016.

The country’s fertility rate — the average number of children a woman will bear in her lifetime — stood at 1.44 in 2016, while a 2.07 rate is said to be needed to maintain the population level.

In the face of a tight labor market, the government is encouraging more women to work. But the goal of eliminating waiting lists to enroll in nursery schools, an Abe administration pledge, has been delayed for the time being.

“We have a national crisis,” said Shinjiro Koizumi, a lawmaker from the ruling Liberal Democratic Party who has proposed the creation of a “child insurance” system.

“We have a system that supports the lives of elderly people as a society but what we have yet to build is one that supports children and child-rearing,” he said earlier this month.

Under the proposed plan, employees and companies would pay fees along with their pension premiums, but critics say the idea is unfair as those without children would be forced to contribute.

At an insurance rate of 0.1 percent, for instance, the financial burden on parents for preschool education could be reduced. The rate would need to be set at 0.5 percent to cover the total cost “in principle,” according to calculations by the lawmakers.

Another option is a consumption tax hike, but economists believe this may be unrealistic after a planned increase to 10 percent was postponed to October 2019.

The latest policy blueprint does not refer to the consumption tax increase, which prompted speculation about another delay.

The issuance of “education bonds,” another option, could complicate Japan’s efforts to improve its tattered finances, with Finance Ministry officials having reservations about the increased burden such a plan would put on future generations.

Debate is expected to intensify in the coming months about the envisaged program, as the need for increased support for education will inevitably be weighed against the harsh reality of the nation’s cash-strapped financial position.

The government has pledged to turn the deficit in the primary balance into a surplus by fiscal 2020, while it now aims to lower another barometer to gauge fiscal health: the debt-to-GDP ratio.

The ratio improves when the economy grows and interest rates are low. The economy is in the longest run of expansion since 2006, while the Bank of Japan aims to keep long-term interest rates near zero.

“The BOJ would have no choice but to maintain its accommodative policy,” said Toru Suehiro, senior market economist at Mizuho Securities Co., adding that the use of the ratio would make it easier for the government to increase spending.

“After years in office, Abe has a revision to the Constitution in his sights. My impression is that the government is pursuing policies such as free preschool education that can resonate (with voters),” Suehiro added.

Education is one of the topics that the LDP has decided to focus on in its debate about the first-ever constitutional amendment, as Abe envisions making higher education free.

The policy blueprint states that the nine-year free compulsory education system — from elementary to junior high school — has become a “major driving force” of postwar economic growth. “We need to make various (forms of) education truly open to all citizens” as society has changed, it said.

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