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Speech on Fiscal Policy by Minister of Finance Tanigaki at the 164th Session of the National Diet


Speech on Fiscal Policy by Minister of Finance Tanigaki
at the 164th Session of the National Diet

January 20, 2006
 
    Before I request the deliberation of the draft budget for fiscal year 2006 and the supplementary budget for fiscal year 2005, 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.

Fundamental Philosophy towards Fiscal Structural Reform
   The Japanese economy has been on a recovery track mainly led by domestic private demand, as a result of the clearance of three excesses that hindered its growth, namely, "excessive employment," "excessive capacity," and "excessive debt," and with resiliency in the corporate sector spreading to the household sector.
   In order to extend such recovery trend to local areas and among small and medium-sized enterprises (SMEs) and make it sustainable, we will further promote structural reform. We will also further reinforce and enhance policy measures, together with the Bank of Japan, to overcome deflation, which seems to be coming to an end but continues to linger.
   On the other hand, Japan's fiscal condition is extremely severe, with the expectation that the long-term debts outstanding owed by the national and local governments will exceed 150% of GDP at the end of FY2006. Such excessive government debts can be regarded as the fourth excess. If the market starts doubting the fiscal sustainability, it may create risk premiums and lead to rises in interest rates, which would have a negative impact on the economy overall. In order to prevent market insecurity, the government must demonstrate a firm attitude toward fiscal structural reforms.
   To this end, we first aim to achieve a primary surplus in the national and local governments in the early 2010s.
   Also, we will deliberate on the desirable structure of expenditures and revenues in an integrated manner, aiming to clarify "options" for and "processes" of such "integrated expenditure and revenue reform" before mid-2006 and reach a conclusion by the end of FY2006. We would like to promote a nationwide discussion on the prospective comprehensive tax reform as well, as a part of "integrated expenditure and revenue reform."
    In the course of promoting "expenditure-revenue reform," we should discuss various issues, such as how to cut the proportion of debt to GDP. Furthermore, "expenditure-revenue reform" is not only intended to make ends meet but also is related to how to shape Japan in the future. Some countries provide "high benefits for high burden," whereas others provide "low benefits for low burden." Currently, the Japanese people are enjoying excessive benefits with a low burden, while passing on their debts to their children and grandchildren; in this respect, Japan provides "mid-level benefits for low burden." In anticipation of the increasing aging of the population and decline in the birthrate, we, the people living today, are responsible for exploring how to build sustainable systems for future generations. In this process, it is absolutely necessary to present choices that are as concrete as possible to the public, thereby enhancing the nationwide debate.

Outlines of the Draft Budget and Tax Reform for FY2006
   While taking the matters mentioned above into account, we formulated the draft budget and the tax reform for FY2006, with the goal of reducing the amount of new government bonds as close as possible to the 30 trillion yen level and also reducing the amount of general account expenditures below the level of the previous year.
   With respect to expenditures, the draft budget reflects the results of various reforms that the Cabinet has been working on, such as medical system reform, the Three-part Reform Package (i.e., reforms on state subsidies, local allocation tax, and allocation [including transference] of tax revenue sources), and reforms to reduce total personnel expenses for public employees. Furthermore, we conducted a strict review on overall expenditure and gave priority to selected areas in budget allocation, e.g., cutting general account expenditures for areas other than social security and science over the previous year.
   Through these efforts, the amount of general expenditures comes to 46,366 billion yen, and the amount of general account expenditures totals 79,686 billion yen, the former dropping below the level of the previous year.
   Next, I would like to discuss the major expenditures.
   With regard to social security-related expenditures, from the perspective of promoting measures to address the declining birthrate and making the social security system sustainable, stable, and efficient in the future, we will carry out reform of the health insurance system to review co-payment of the elderly and to lower medical care fees by 3.16% overall.
   With regard to expenditures for education and science, we will make more efforts to promote structural reforms aiming to improve the quality of compulsory education, ensure children's safety and security, and intensively sponsor selected projects in science and technology development.
   With regard to national defense-related expenditures, while reducing overall defense spending, we will aim to achieve an efficient and moderate defense buildup and make prioritized budget allocations for measures to cope with new threats such as ballistic missiles.
   With regard to public investment-related expenditures, we will prioritize investments that will contribute directly to ensuring public security through measures to prevent disaster and reduce damage and improving Japan's competitiveness, while also reducing the overall amount of the expenditures.
   With regard to economic cooperation, we will place priority on support for the international fight against terrorism and the promotion of human security, while aiming to provide cooperation more efficiently.
   With regard to expenditures for SMEs, we will prioritize the development of infrastructure technology that will contribute to strengthening Japan's industrial competitiveness, while leaving to local governments what can be done by them.
   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, while reviewing administrative operations in this area.
   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.
   With regard to expenditures to ensure law and order, we will place priority on increasing the number of security-related officers and take other measures to establish a society where we can live in peace and security.
   With regard to the Three-part Reform Package, an agreement between the government and the ruling parties was reached in November 2005, which aims to reform local government subsides of over 4 trillion yen and transfer tax revenue sources of about 3 trillion yen to local governments. As for local allocation tax, we will reduce the total amount of the local allocation tax by about 1 trillion yen through a thorough review of local expenditures, while increasing the total amount of general finances including local tax for local governments over the previous year, so as to enable local governments to achieve stable fiscal management.
   We will also work toward improving the quality and efficiency of budgets by reflecting in them the actual results of budget implementation and the reports on inspection of the settlement of accounts.
   Furthermore, we will take into consideration reforms that are proposed in the "Key Policies for Administrative Reforms" announced in December 2005.
   With regard to personnel expenditures for public employees, based on the "Action Plan on the Reform of Total Personnel Expenditure" included in the Key Policies, we will make efforts to carry out the reform by reducing the number of regular staff of administrative bodies significantly, by 1,455, while reforming the salary structure.
   With regard to reforms of national assets and liabilities, we will make our best efforts to slim down the size of national assets through reduction of the amount of outstanding Fiscal Loan Fund loans and promotion of the sale of national property, while actively working toward strengthening the management of national assets and liabilities. From this perspective, we will decisively carry out reforms of national property administration emphasizing efficiency, by encouraging effective use of national property by the promotion of private use and further promoting sale of unused national land. To achieve these goals, we will submit an amendment bill for the National Property Law and related laws to the current session of the Diet. Furthermore, with respect to housing for national government officials, we will develop a specific plan to move and relocate those housing located in central Tokyo to suburban areas, sufficiently taking into account the views of the private sector.
   With regard to special accounts, we will promote in-depth reforms in the next five years, including abolishment and consolidation of special accounts. In the draft budget for FY2006, we will conduct a thorough expenditure review and allocate reserves and surpluses totaling about 13.8 trillion yen to fiscal consolidation. More specifically, from the perspective of pursuing reforms of national assets and liabilities, we will transfer 12 trillion yen from the special account for Fiscal Loan Fund into the special account for the Government Bonds Consolidation Fund so as to reduce outstanding government bonds. This measure will mitigate the future burden of debt servicing costs and contribute to solving the "FY2008 issue" concerning government bonds.
   With respect to revenues, as part of the Three-part Reform Package, we will transfer tax revenue sources totaling about 3 trillion yen from national income tax to local inhabitant tax, and abolish the proportional across-the-board tax credit, taking into account the improvements of economic conditions. We will also take measures in relation to corporate taxation, taxation of land and housing, international taxation, liquor tax, and tobacco tax.
   Through these efforts, tax revenues are expected to amount to 45,878 billion yen, and other revenues are expected to total 3,835 billion yen.
   As a result of these expenditure and revenue reforms, the amount of new government bonds issues will drop to 29,973 billion yen, and the general account primary balance will improve for the third consecutive year. Thus, we successfully implemented our policy of maintaining and strengthening fiscal discipline in the draft budget for FY2006, thereby further advancing efforts toward fiscal consolidation and establishing a foundation to discuss the "expenditure-revenue reforms."
    Furthermore, with outstanding Japanese Government Bonds (JGBs) reaching a very high level and large-scale issuance of government bonds including refinancing bonds expected, it is becoming more and more important in terms of fiscal management to implement an appropriate debt management policy. From this viewpoint, we will aim to ensure stable and smooth financing and reduce medium- to long-term financing costs, and we will continue our efforts to issue bonds meeting both market and issuer needs.
   As for the Fiscal Investment and Loan Program (FILP) for FY2006, we conducted follow-up of the comprehensive review of the FILP reform to verify the fiscal soundness of each program, and selected target areas and projects while emphasizing priority and efficiency. Through such efforts, we reduced the total amount of loans provided under the program to 15,004.6 billion yen, below 40% of its peak level in FY1996.

Outline of the FY2005 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 outline the FY2005 Supplementary Budget.
   In order to meet unavoidable fiscal demand, the government will appropriate additional disaster management expenditures and mandatory expenditures as well as expenditures for asbestos-related measures. The government also will appropriate surpluses 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 an increase in tax revenues and non-tax revenues and records settlement surpluses in the previous fiscal year, while reducing the issuance of government bonds.
   As a result, the revised FY2005 general account budget totals 86,704.8 billion yen, an increase of 4,521.9 billion yen in both expenditures and revenues from the initial budget.
   The government will also supplement, as necessary, the special account budgets and the budget of government-affiliated agencies.

Contribution to the Stabilization and Development of the World Economy
   From the perspective of ensuring the continued development of the Japanese economy, contributing to the stability and development of the world economy, in cooperation with international organizations, other G7 countries, Asian countries, and others, is an important task.
   With our Asian neighbors, we will further enhance the effectiveness 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.
   In light of the importance of strengthening our tax treaty network in stimulating mutual investments, we will also work towards revising tax treaties.
   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.
   We contributed to the progress of the WTO Doha Round negotiations through the announcement of the "Development Initiatives" at the Hong Kong Ministerial Conference at the end of 2005. We will continue our efforts with the aim of concluding the negotiations by the end of this year. Furthermore, we made progress in negotiations for economic partnership agreements in 2005, such as signing an agreement with Malaysia. We will make more efforts to promote negotiations with other countries. Through these negotiations, we will also promote trade facilitation, including the simplification and harmonization of Customs procedures.
   In the FY2006 revision of tariff-related laws, we will reduce tariffs for oil products and enhance and strengthen Customs enforcement at our national borders targeting products infringing intellectual property rights.
   This concludes the outlines of the draft budget for FY2006 and the supplementary budget for FY2005. I hereby request my fellow parliamentarians to deliberate on the draft budgets along with related bills and promptly give your approval.

Conclusion
   Today, Japan faces two major structural changes: the emergence of an era of declining population and the global changes in competitive conditions, and our nation must further accelerate fiscal structural reforms and other necessary reforms.
   To achieve this, we must demonstrate that the structural reforms will lead to the creation of a society full of vitality and based on relationships of trust where individuals work hard to compete with each other, while also supporting each other through family or community ties which Japanese people have traditionally held dear, rather than a society where the weak are victims of the strong.
   Seeing that young people rushed to help the victims of the Great Hanshin-Awaji Earthquake and that residents are protecting the children of their communities, I am encouraged; I see in them promising signs of a new public sector. When each citizen plays a role as a member of the public sector, family and community ties as well as ties between citizens and the government will be rebuilt. By encouraging citizens to participate in the public sector, we can ensure that they gain a better understanding of public finance.
   I sincerely ask for the understanding and cooperation of all people in Japan.
 
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