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Speech on Fiscal Policy by Minister of Finance Tanigaki at the 162ndSession of the National Diet

(ProvisionalTranslation)

Speech on Fiscal Policy by Minister of Finance Tanigaki
at the 162nd Session of the National Diet
 

January 21, 2005
 
    Before I request the deliberation of the draft budget for fiscal year 2005 and the supplementary budget for fiscal year 2004, I would first like to state the fundamental philosophy towards fiscal policy and other future policies, and also give an outline of the draft budget.
 
Introduction
    Last year, a succession of natural disasters, including large typhoons that hit many places in Japan, the Niigata Prefecture Chuetsu Earthquake(NPCE), and the Indian Ocean Tsunami triggered by the large-scale earthquake off the coast of Sumatra, caused enormous damage for a great number of people. I wish to express my deepest condolences to those who lost loved ones in these disasters, and also to express my sympathy to all who were affected. The government will continue to make every effort to promote rehabilitation and reconstruction in the affected areas.
 
Fundamental Philosophy towards Fiscal Structural Reform
    Thanks to efforts for structural reform both in the government and private sectors, the Japanese economy has emerged from a prolonged recession, and has been recovering mainly in domestic private demand, without relying on fiscal expenditures. In order to spread such a recovery trend across local areas and among small and medium-sized enterprises (SMEs) and make it sustainable, we will further promote structural reform. We will also reinforce policy measures, together with the Bank of Japan, to overcome deflation, which is moderate but still exists.
   On the other hand, Japan's fiscal conditions are extremely severe, with outstanding government bonds expected to reach nearly 538 trillion yen at the end of FY2005. If such condition were to continue, it would harm economic growth.
   Therefore, it is critically important that we build a sustainable fiscal structure. With the goal of achieving a primary surplus in the early 2010s, we should continue promoting fiscal structural reform, from both aspects of expenditures and revenues. In this respect, the following three points must be taken into consideration.
   First, with regard to expenditures, it is absolutely necessary to review the existing social security system. If nothing is done, the benefits and burdens of social security will increase beyond economic growth. In order to build a sustainable social security system, we should aim at coordinating the scale of benefits and burdens so that the system suits the size of the national economy, while comprehensively considering all factors such as pensions, medical care, and nursing case. It is also important to and review the current sharing of roles between self-help efforts and public support, and bring about changes in public awareness, by helping the public to realize the importance of fostering the next generation and changing the traditional view that uniformly regards all elderly as weak.
   Second, with regard to revenues, we should also establish an optimal taxation system in light of the major structural changes taking place in Japan, such as the declining birthrate, aging society and globalization. To this end, while taking into consideration the past policies of the government and the governing parties, we will take specific tax reforms with a view to ensuring the fair distribution of common costs in society and realizing the sustainable invigoration of the economy and society in reviewing the measures taken during periods of economic stagnation.
   Third, in order to build a sustainable fiscal structure, efforts should be made on both national and local levels. In carrying out the Trinity Reform (i.e., reforms on state subsidies, local allocation tax, and allocation [including transference] of tax revenue sources) from this perspective, it is important to expand the authority and responsibility of local governments so that they have more opportunities to choose and provide public services at their own discretion. It is also important to streamline administrative operations on both national and local levels.
   With the aim of gaining public understanding of these efforts towards fiscal structural reform, we should explain the current fiscal condition to the public in an easy-to-understand manner, and take necessary measures to thoroughly review expenditures and improve the quality of budgets, while promoting administrative reforms, such as the privatization of public services.
 
Outlines of the Draft Budget and Tax Reform for FY2005
    Regarding the draft budget and the tax reform for FY2005, we will take measures to reform both expenditures and revenues, taking the matters mentioned above into account.
   With respect to expenditures, we will strive to promote thorough reforms that do not allow any sanctuaries, while continuously pursuing and further strengthening expenditure reforms.
   Through these efforts, the amount of general account expenditures totals 82,182.9 billion yen and the amount of general expenditures comes to 47,282.9 billion yen, the latter dropping below the level of the previous year for the first time in three years.
   As for the number of regular national public servants, we aim to reduce the number of regular staff of administrative bodies by 728, while appropriately staffing sections that are truly necessary, such as public security.
   Next, I would like to discuss the major expenditures.
   With regard to social security-related expenditures, we will review long-term care insurance payments from the perspective of correcting duplicate payments under multiple systems and balancing users' burdens between home and nursing facilities.
   With regard to public investment-related expenditures, we will prioritize investments that will directly contribute to improving Japan's competitiveness, while also reducing the overall amount of the expenditures.
   With regard to expenditures for education and science, we will promote reforms aiming to improve the quality of education and research as well as improve the quality of relevant budgets by increasing competitive research grants.
   With regard to national defense-related expenditures, while drastically reducing overall defense spending, we will aim at an efficient and moderate defense buildup and make prioritized budget allocations to measures to cope with new threats, such as terrorism and ballistic missiles, in accordance with the new National Defense Program Guideline and the Mid-Term Defense Program.
   With regard to the agriculture, forestry and fisheries-related budget, we will place priority on the acceleration of structural reforms and food safety and security, while also reducing the overall amount of the expenditures.
   With regard to economic cooperation, we will place priority on the promotion of human security, while securing necessary funds for providing cooperation strategically and effectively.
   With regard to expenditures for energy, we will steadily carry out measures to ensure a stable supply of energy and make efforts to counter global warming through energy conservation.
   With regard to expenditures for SMEs, we will promote entrepreneurship and innovative business management, as well as strengthen the basis for securing smooth funding for SMEs.
   With regard to expenditures for to ensure law and order, we will place priority on the increase of the number of prefectural police officers and take other measures to establish a society where we can live in peace and security.
   With regard to the Trinity Reform, we will reform local government subsides (approx 1.8 trillion yen) by transferring tax revenue sources to local governments, slimming them down and so on. Following this, we also will take measures to secure financial sources for local governments through the transfer of income tax to local governments. Furthermore, as for local allocation tax, we will reduce the overall amount of the local allocation tax in the general account through a review of local expenditures, and will maintain the total amount of local allocation tax in the previous fiscal year, while paying due attention to the management of local finances. As a result of the current reform, financial indicators of local governments such as the bond dependency ratio and primary balance will be significantly improved.
   With regard to special accounts, we will make constant efforts to promote reforms from the perspective of reviewing administrative operations. We also will work towards improving the quality of budgets by implementing policy evaluations and reflecting the settlement of accounts in budgets.
   With respect to revenues, in light of the drastic review of individual income taxation on both the national and local levels in FY2006 in connection with the Trinity Reform, we intend to reduce the benefits of the proportional across-the-board tax credit by half, while taking into consideration improvements in economic conditions compared to those of 1999, when the tax credit was introduced as a temporary exceptional measure to stimulate the economy. We also intend to take appropriate measures in the taxation of housing, financial assets and stocks, international transactions, and SMEs from the perspective of revitalizing the economy and ensuring fair taxation.
   Through these efforts, tax revenues are expected to amount to 44,007.0 billion yen, and other revenues are expected to total 3, 785.9 billion yen.
   As a result of these expenditure and revenue reforms, the amount of new government bonds will drop below the level of the previous year for the first time in four years, down to 34,390.0 billion yen, and the general account primary balance will continue to improve. Thus, we successfully implemented our policy of maintaining fiscal discipline.
   Furthermore, with outstanding Japanese Government Bonds (JGBs) reaching a very high level and large-scale bond issues being expected, it is becoming more and more important to implement an appropriate debt management policy in connection with fiscal management. So far, we have been committed to taking various measures such as introduction of the JGB Market Special Participants System and new bond products. With a view to ensuring stable and smooth financing and reducing medium- to long-term financing costs, we will continue our efforts to enhance debt management policy, through the issuance of bonds according to market needs and trends and the diversification of JGB instruments and the composition of JGB holders.
   As for the Fiscal Investment and Loan Program (FILP), we conducted comprehensive reviews of the progress of the reform of the FILP and the financial strength of all FILP programs. The Government Housing Loan Corporation and the Urban Renaissance Agency account for a large share of the outstanding balance of FILP. The review of the Government Housing Loan Corporation abolishes direct loans which are provided by private sector, and the Urban Renaissance Agency withdraws from new town projects. With these reviews, we remove future fiscal concerns and further improve the financial strength of FILP programs.
   For the FY2005 FILP plan, we reduced the total amount to 17,151.8 billion yen while aiming to prioritize and make more efficient target areas and projects, in light of the Reorganization and Rationalization Plan for Special Public Institutions.
 
Outline of the FY2004 Supplementary Budget (Article 1 of the General Account, Article 1 of the Special Account, and Article 1 of the Budgets of Government Agencies)
    Next, I will give an outline of the FY2004 Supplementary Budget.
   The government will appropriate a total of 1,361.8 billion yen as disaster management expenditures for rehabilitation and reconstruction of areas affected by large typhoons and the NPCE. The government also will appropriate budgets for additional mandatory expenditures, surplus in the previous fiscal year to be transferred into the Government Bonds Consolidation Fund, and local allocation tax grants, while retrenching existing expenditures.
   As for revenues, the government expects tax revenues and non-tax revenues to increase without issuing additional government bonds, and records settlement surpluses in the previous fiscal year.
   As a result, the revised FY2004 general account budget totals 86,878.7 billion yen, an increase of 4,767.8 billion yen in both expenditures and revenues from the initial budget.
   The government also will supplement, as necessary, the special account budgets and the budget of government-affiliated agencies.
   As for the FILP Plan, the government additionally will appropriate a total of 5.4 billion yen as budget for measures for disaster recovery.
 
Contribution to the Stabilization and Development of the World Economy
    Along with all the efforts mentioned above, we will also strive to contribute to achieving stability and development of the world economy, in cooperation with international organizations, other G7 countries, Asian countries, and others. With our Asian neighbors, we will pursue the review of the Chiang Mai Initiative, a regional framework for preventing and responding to currency crises, and promote the Asian Bond Markets Initiative, a framework for making better use of Asian savings for regional investments. We will also work towards revising tax treaties for the purpose of stimulating mutual investments in Asia.
   As for exchange rates, it is important that they remain stable, reflecting economic fundamentals. We will continue to closely monitor exchange rate trends and take appropriate measures as necessary.
   Furthermore, we will proactively engage in the negotiations on the WTO New Round as well as those for economic partnerships with ASEAN countries, the Republic of Korea, and others. Through these negotiations, we will also strive for trade facilitation, including the simplification and harmonization of Customs procedures. In the FY2005 revision of tariff-related laws, we will strengthen Customs enforcement at our national borders and further speed up Customs clearance.

   This concluded the outlines of the draft budget for FY2005 and the supplementary budget for FY2004. I hereby request my fellow parliamentarians to deliberate on the draft budgets along with related bills and promptly give your approval.
Conclusion
    In order to achieve sustainable development for Japan in this age of globalization, it is important to increase our nation's attractiveness so that it will be highly viewed by the world. If doubt over the sustainability of Japan's fiscal structure persists, however, it might be difficult to achieve this goal.
   I believe that the draft budget for FY2005 will be a milestone towards building a sustainable fiscal structure, Japan's fiscal condition is still very severe, however, with the bond dependency ratio remaining at the high level of 41.8%. We should continue to communicate the country's current fiscal conditions to the people, and while encouraging them to discuss what and to what extent they should demand from the "public sector" and how they should share the burden of public service, we should also take various actions in light of the problems and anxieties people face across all levels of Japanese society.
   I sincerely ask for the understanding and cooperation of all people in Japan.
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