V CURRENT JAPANESE FISCAL CONDITION

As a result of the circumstances mentioned in chapter II "History of Public Finance", the Japanese fiscal conditions have deteriorated significantly. The gap between the general account expenditures and the tax revenues has widened especially in recent years, and this situation has caused an increase in the government bond issues.
As for expenditures, the increase of expenditures has been caused by the public investment related expenditures aiming to stimulate economic growth and the social security related expenditure due to the aging society or other factors. Though the total amount of expenditures recorded its peak in FY2000, the general expenditures have declined for tree consecutive years through the government's fiscal consolidation efforts. On the revenue side, the amount of total tax revenues reached the peak of 60 trillion yen in FY1990. But they have fallen significantly due to the economic slowdown and successive tax cut.

The necessity to make up for revenue shortfall and increasing expenditures caused issuance of government bond. Bond issuance in FY1999 reached its record high of 37.5 trillion yen. In spite of the recent effort to decrease the bond issuance, the bond issuance is still high and bond dependency hit a record high of 44.6% in the FY2003 budget.

The amount of outstanding bonds has continued to rise at an increasing rate, and it is expected to amount to around 450 trillion yen at the end of FY2003, the amount that will be equal to approximately 11 years worth of general account tax revenues. In other words, the amount will be approximately 3.53 million yen per person and 14.13 million yen per family of four members. This will leave a great burden to the current and future generations.

As a result of the successive issuance of the government bonds, the cost of overall national debt services reached approximately 16.8 trillion yen in the FY2003 budget, amounting to 20.5% of general account expenditures. 9.1 trillion yen of this cost is for interest payments, and amounts to 11.1% of general account expenditures. The amount of outstanding bonds have increased annually, along with annual bond issuance, but interest payment have been maintained at approximately 9 trillion yen, due to the historically low interest rates. If interest rates take a rising trend along with future economic recovery, interest payments will also increase accordingly.

(1) General government financial balance
According to the "OECD Economic Outlook" issued in December 2002, the fiscal deficit in Japan in CY2003 will be 7.7% of GDP on a general government basis, and 7.7% excluding social security funds, which is the worst deficit among major advanced countries. (Chart I-7)
According to the estimate of the Japanese Government, the fiscal deficit (on a general government basis excluding social security) of GDP will be 7.7% in FY2002 (revised budget), and 8.1% in FY2003.

(2) General government gross debt
According to the "OECD Economic Outlook" issued in December 2002, the gross debt in Japan has increased rapidly and will be 151.0% of GDP on a general government basis in CY2003, while the gross debt of other major advanced countries have continued to decrease.
According to the estimate of the Japanese Government, the ratio of government gross debt to GDP (on a general government basis excluding social security) will be approximately 153.4% at the end of FY2002 (after revision) and approximately 163.3% at the end of FY2003.

[Reference]
Problems associated in using figures based on "general government basis"

International comparisons of fiscal situations in various governments are often carried out on a "general government basis," since its framework is internationally applicable, making it easier to compare the fiscal situations of governments under different budget systems.
Since the definition of "general government" is generated from statistical necessity, some limitations need to be recognized in analyzing the financial balance on a general government basis.

Social security funds
    The pension system in Japan is based on a partially funded system, which is designed to accumulate in advance -- before the system reaches maturity -- as funds for future benefit payments. Therefore, the accumulated funds, which are accounted as surplus in social security funds, should be considered a debt owed to future beneficiaries and should not be drained to cover shortfalls in central government or local government accounts. The combination of the two sectors' balances thus tends to conceal the serious deficit of the central government and local governments.
    It should also be noted that the surplus in social security funds is expected to decrease as the Japanese population ages rapidly and the pension system matures in the near future.
    In view of the above points, the "OECD Economic Outlook" has indicated the fiscal balance both on a general government basis and on a basis excluding the surplus of social security funds.