Can Increased Public Expenditure Efficiency Contribute to the Consolidation of Public Finances in Japan?

The main narrative about the Japanese fiscal situation is about the unsustainable debt trajectory. On the public expenditure side however, Japan is relatively more efficient that its peers: using a Data Envelopment Analysis (DEA) methodology over a range of public policies, this paper finds that Japan has high efficiency score in health care, intermediate scores in education and non-pension social expenditures, but lower scores for administrative or infrastructure expenditures. Overall the input efficiency score of Japan is of 0.78 percent against 0.71 for the OECD on average and 0.64 percent for advanced G20 countries. We conservatively estimate that the scope for efficiency savings is of the order of 2.5 percentage points of GDP or 8 percent of non-pension public expenditures. Adding additional sectors were Japan overspends relative to its peer (such as agriculture or waste management), the overall saving could be of around 3.4 points of GDP, a significant contribution to the consolidation of public finance. There are however two caveats to the main results: Japan has comparatively less scope to consolidate its public finance through enhancing efficiency that its peers in the OECD, where efficiency savings are of the order of 4.1 points of GDP, or advanced G20 economies with savings of 4.7 points of GDP; aging pressures will contribute to further increase social expenditures, no matter how efficient they might be.