Lessons from Generational Accounting in Japan

Many economists today agree with the use-fulness of generational accounting as a pow-erful alternative to conventional measures of budget deficits. Japan provides the primary ex-ample of showing a huge discrepancy between one of the lowest ratios of net debt to GDP and the highest imbalance of generational ac-counts. The complete lack of a consistent re-lationship between a nation’s deficit or debt positions and the its generational imbalance is not surprising, given that there is no intrinsic connection between the two measures. Some may argue that Japan’s ratio of gross debt to GDP has already reached an alarm-ingly high level, second only to Italy among OECD countries. The gap between the gross debt and the net debt is mainly explained by the accumulation of surpluses in the social-security system. As social-security funds are held to fulfill the government’s pledge to pay future pensions, the Japanese government can less afford to keep spending its way out of the current economic crisis. Generational accounting, in fact, sheds light on the large unfunded portion of future pension liabili-ties. In other words, the future liabilities (i.e., off balance sheet) of the government can be captured by this innovative account-ing method. There are some reasons for the worsening of Japan’s fiscal position. First, growth in tax revenue has remained very low as the econ-omy itself has grown very slowly in recent years. Second, the population is aging at a