V CURRENT JAPANESE FISCAL CONDITION

4. Projection of the FY2004 Budget's Effects on Outlays and Revenues through FY2007

This projection presents how the FY2004 budget policy affects future outlays and revenues of the general account budget. Economic assumptions are based on the statements of ''Structural Reform and Medium-Term Economic and Fiscal Perspectives - FY2003 Revision'' (Cabinet decision, January 2004). It should be noted that this projection does not bind the government's future budget formulation, and the figures presented here varies according to changes in assumptions.

Economic Assumptions

	FY2004 (government economic outlook)	FY2005	FY2006	FY2007
Nominal GDP Growth Rate	0.5%	1.25%	2.00%	2.50%
C P I	-0.2%	0.50%	1.00%	1.50%

Notes:	The economic assumptions are drawn from the statement of ''Structural Reform and Medium-Term Economic and Fiscal Perspectives - FY2003 Revision'' that ''It is expected that after ''Intensive Adjustment Period'' real GDP growth rate will be around 1.5% or higher, while nominal GDP growth rate will reach around 2% or higher after FY2006 following gradual rise''.
[Profection Results]

Notes 1.		Figures in parentheses indicate changes in percentage from the previous fiscal year.
2.		Figures for FY2003 are based on the initial budget.
3.		Subsidies for redemption of the NTT interest-free loans (B type), which were included in the second suppmentary budget for FY2001, are accounted for in ''outlays'' after FY2004. Moreover, amount corresponding to transfer from the Industrial Investment Special Account is accounted for in ''National Debt Service,'' and transfer from the Industrial Investment Special Account is included in ''Non-tax Revenues.''

[Projection Method]
National Debt Service		Interest rate is assumed to be 2.0% for 10-year JGB. The difference between ''Outlays'' and ''Tax and Non-tax Revenues'' is assumed to be fully funded through bond issues.
Local Allocation Tax		Elasticity of the statutory rate portion of LAT against nominal GDP is assumed to be 1.2. Moreover, redemption of borrowing by the Special Account for LAT is assumed to start in FY2007 as prescribed by article 4-2 of the supplementary provisions of the LAT Act.
General Expenditures		FY2004 Budget policy is assumed to continue in the coming years, while CPI increase rate is taken into account.
Tax Revenues		Elasticity against the nominal GDP growth rate of 1.1 is assumed (The FY2004 tax reform is taken into account).
Non-tax Revenues		Elasticity against the nominal GDP growth rate of 1.0 is assumed.

(Note 1)		As for the fiscal relationship reform between central and local governments, only the reform up to the FY2004 budget is reflected in the projection.
(Note 2)		In the Social Security Related Expenditures of FY2005, an increase in the state contribution to the benefits of the Basic Pension corresponding to an annualized increase in tax revenues brought by review on taxation of pensions decided in the FY2004 tax reform is included.

[Reference]

Alternative assumption 1: Interest rate of 3.0% for 10-year JGB in the profection period (FY2005~2007)

(trillion yen, %)

Alternative assumption 1: Interest rate of 3.0% for 10-year JGB in the profection period

Alternative assumption 2: Nominal GDP growth rate of 0.50% and CPI increase rate of 0.00% in the projection period.

(trillion yen, %)