Speech

Achieving Sustainable Social Spending, Keynote Address at Tokyo Fiscal Forum 2016 by Mitsuhiro Furusawa

June 5, 2016

Tokyo, June 6, 2016

As Prepared for Delivery

On behalf of my colleagues at the IMF, it is my honor and pleasure to welcome you to the second Tokyo Fiscal Forum. I would like to thank the Policy Research Institute of Japan’s Ministry of Finance, and the Asian Development Bank for organizing this conference.

The aim of Tokyo Fiscal Forum is to facilitate exchanges among policy makers to improve growth-friendly fiscal policy formulation and implementation. This year we focus on healthcare and public pensions as the principal themes.

Why now? This is an appropriate moment to discuss these topics because many Asian countries face the unaccustomed challenge of sustaining long-term, inclusive growth in the face of rapidly changing demographics and rising income inequality. Already in some countries, aging populations and falling birth rates have become a bottleneck for economic growth with important implications for public finances. Some of the widest income disparities in the world are in this region.

Slower Asian Growth
The current global economic situation is germane to this discussion. Global economic prospects remain challenging, and downside risks have become more prominent. Although Asia remains the most dynamic region of the global economy, its growth is expected to decelerate slightly to 5.3 percent during 2016–17. It is essential that we work together to lift global growth, to strengthen resilience to vulnerabilities and risks.

Our work at the IMF has shown that rising income inequality can be harmful for economic growth. It is therefore essential for policy makers to balance the appropriate policies to cope with demographic transitions and increasing income inequality with the imperative of maintaining sound fiscal management.

In order to achieve sustainable, inclusive, and long-term growth, policymakers need to push ahead with structural reforms, supported by appropriate monetary policies and well-designed fiscal policies. Health care and pensions are an important piece of the structural reform agenda in Asia. I will talk about each in sequence.

Health Care
Let me turn first to the issue of health care. In the past several decades, significant improvements in health indicators have been achieved around the world, but there are still large gaps between developing and advanced economies. Strengthening health care systems can help reduce theses gaps and generate significant economic benefits. Better health care can enhance human capital, improve productivity, and strengthen the social safety net. Over the medium term it can help reduce income inequality. The provision of health services and expanded health insurance programs to all citizens can contribute to the implementation of the UN 2030 agenda for sustainable development, particularly the objective of achieving universal health coverage.

But doing this in a fiscally sustainable manner is necessary to ensure the future viability of health programs. Many developing countries currently have limited fiscal space due to relatively low ratios of government revenue to GDP. They face competing development needs from other areas, such as infrastructure, education, and other social spending.

Meanwhile, controlling health spending growth by improving program efficiency will be a key fiscal challenge in the coming years. In advanced countries, health care costs have been growing rapidly in the past several decades. Spending pressures are expected to intensify, not only in advanced, but also in emerging and in developing countries. This will be driven by aging, income growth, and technological advances.

Cost-effectiveness needs to be taken more seriously in determining the coverage of services under universal health care. Recent technological progress gives rise to more attractive, but more expensive healthcare options. Health technology assessments, which evaluate value for money of clinical procedures, are expected to play a more critical role to deciding the coverage to achieve a balance between taking advantage of innovations and fiscal sustainability.

Pensions
Turning now to pensions, it may be useful to ask what its role is. I see two main objectives: to protect people against poverty and to ensure that there is no abrupt and large decline in consumption during old age. Because the design of pension systems affects decisions regarding participation in the work force and savings, it has implications for economic growth. If designed well, pension systems can enhance growth and improve welfare and equity—but design shortcomings can impose unnecessary fiscal burdens and welfare losses.

In many Asian countries, increasing pension coverage in an affordable way remains a key challenge. This reflects, in part, the size of the informal sector, so promoting greater formalization of the economy would help close the coverage gap. To reduce poverty among the elderly, pensions providing a flat benefit financed by general tax revenues could be considered. To contain costs and enhance formalization of the economy, such plans should be well targeted.

A common challenge is to prepare pension systems to accommodate demographic transitions in a sustainable way. Aging population will increase the costs of pension benefits, while lower fertility rates will result in a smaller labor force and reduced revenues. However, demographic trends are subject to uncertainty and many countries have experienced unanticipated demographic shifts, which have imposed unexpected fiscal burdens on public pension systems.

The pension systems can be designed to respond to future demographic changes. The Japanese system, for instance, automatically slows the growth of benefits to offset increases in life expectancy and changes in the labor force. The notional defined contribution system, first adopted in Sweden, also has an automatic balancing mechanism.

For countries facing a clear mismatch between life expectancy developments and retirement ages, raising the statutory retirement age has clear advantages over reducing benefits. It would guarantee adequate benefits to future retirees, extend the productive life of individuals, and enhance labor participation.

Finally, I would emphasize that reforms of public pension systems take years, even decades, to fully implement. Therefore, reform goals should be well communicated to the public to achieve broad and lasting support.

I hope that this conference will provide a better understanding of the need to take a holistic approach to evaluate the fiscal and welfare consequences of various policy options for health care and public pension systems. Appropriate design of these programs is key for achieving sustainable and inclusive growth. The IMF is committed to continue supporting member countries’ efforts in this area through advice and sharing of experiences, and with technical assistance. I would like to thank you again for your participation, and wish you two productive days in Tokyo.