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Speech on Fiscal Policy by Minister of Finance nukaga at the 169th Session of the National Diet

Speech on Fiscal Policy by Minister of Finance Nukaga
at the 169th Session of the National Diet

January 18, 2008

Before I request deliberation on the draft budget for FY2008 and the supplementary budget for FY2007, I would like to provide an outline of the draft budgets and state the government's basic philosophy concerning the future management of fiscal and other policies.

Status of the Japanese Economy and Tasks to Perform

Having overcome a prolonged slump that followed the collapse of the “bubble economy,” the Japanese economy is recovering, while some weaknesses are seen. Meanwhile, attention must be paid to the crude oil price surge and the conditions of overseas economies. The government will continue to strive to ensure sustainable growth led by private-sector demand under price stability through joint efforts with the Bank of Japan.

As for regional economies, there are differences in the degree of recovery from region to region against the background of the differences in population movements and industrial structures. Regional economies, where the aging of society has advanced ahead of urban areas, indicate what urban areas will be like in the future with further progress of aging. Therefore, we need to strive to revitalize regional economies as a national task.

Furthermore, in order to maintain sustainable growth amid ongoing economic globalization, it is necessary for Japan to promote cooperation with other countries while making use of its advantage in Asia, which has been showing remarkable growth. As the chair of this year’s G8 Summit, Japan will promote cooperation with its G7 partners, Asian countries, international organizations and others. Japan will also make efforts to strengthen the multilateral free trade system centered around the World Trade Organization, actively promote Economic Partnership Agreements, reform the customs system for the purpose of enhancing global competitiveness and strengthen our tax treaty network so that the Japanese economy and society can be opened more widely to the outside world.

Due to factors such as a population shrinkage caused by the declining birthrate and aging, global economic competition and the expansion of outstanding government debts, the Japanese economy faces an increasingly severe situation both internally and externally. In order to maintain sustainable growth and ensure a more affluent life for the Japanese people under these circumstances, the government will steadily implement measures to strengthen the Japanese economy’s growth potential and, at the same time, achieve fiscal consolidation.

Outlines of the Draft Budget for FY2008 and Tax System Reform Plan

In formulating the draft budget for FY2008, we have avoided letting up our ongoing efforts toward restoring fiscal health, and maintained the policy of pursuing expenditure reform that was set forth in “Basic Policies for Economic and Fiscal Management and Structural Reform 2006,” known as “Basic Policies 2006,” by ensuring the implementation of necessary reform measures in areas such as social security and public works in the second year of this reform.

Furthermore, we have made exhaustive efforts to eliminate waste in the formulation of the draft budget. In addition to reviewing discretionary contracts and enhancing efforts to reflect points raised by the Board of Audit of Japan, we have made more cutbacks and revenue-gains than last year, based on the results of the annual budget expenditure review in the process of FY2008 budget formulation.

As well, the draft budget may be described as a “budget of reform, safety and security,” so to speak, as budget items have been prioritized with due consideration of tasks such as strengthening the Japanese economy’s growth potential, revitalizing regions and ensuring the public’s safety and security.

 

As a result, the general account budget will increase by 306.1 billion yen from the previous year’s initial budget to 47,284.5 billion yen, representing a smaller increase than in the previous year’s initial budget. Regarding the finances of local governments, with a view to securing the necessary funds for regional revival, we will create an expenditure item of 400 billion yen for regional revival by taking advantage of the benefits brought about by correcting the unbalanced distribution of local taxes, and increase local allocation tax grants for the first time in three years. At the same time, we will reduce the total amount of expenditures of local government as a whole, excluding the newly-created expenditure item for regional revival, for the seventh straight year, thus maintaining the policy of pursuing expenditure reform. As a result, local allocation tax grants etc. will increase by 682.0 billion yen from the previous year’s initial budget to 15,613.6 billion yen.

The general-account budget, which includes debt-servicing costs worth 20,163.2 billion yen in addition to the aforementioned expenditures, will total 83,061.3 billion yen, representing an increase of 152.5 billion yen from the previous year’s initial budget.

On the revenue side, we project tax revenues of 53,554.0 billion yen, an increase of 87.0 billion yen from the previous year’s initial budget, and other revenues are projected at 4,159.3 billion yen.

As the growth in projected tax revenue remains small, we will make maximum efforts regarding both revenues and expenditures and managed to limit the issuance of new government bonds to 25,348.0 billion yen, thus achieving a reduction for the fourth straight year. Furthermore, in light of the ongoing “Reform of Government Assets and Liabilities,” “Reform of Special Accounts” and so on, we will reduce the balance of outstanding government bonds by withdrawing 9.8 trillion yen out of the Interest Rate Volatility Reserves in the Fiscal Investment and Loan Program (FILP) Fund. This measure will lead to underscoring, both domestically and to other countries, Japan’s policy stance to pursue fiscal consolidation.

 

Next, I will explain the major expenditure items.

Regarding social security-related expenditures, we will place priority on measures to ensure the safety and security of people’s lives, such as maintaining a sufficient number of doctors in the prefectures where doctors are in demand. At the same time, from the viewpoint of curbing expenditures through continued efforts to reform the social security system, we will implement measures such as revising medical fees and drug prices in a priority-oriented manner, promoting the use of generic drugs and having employee insurance systems provide financial support to the government-managed health care system.

As for expenditures related to education and science, we will place priority on measures that will contribute to the establishment of reliable public education and increase appropriations for science and technology, which should be the driving force behind innovation-led economic growth while thoroughly enforcing the policy of “selection and concentration” in this area.

Concerning defense-related expenditures, we will endeavor to further reduce costs and enhance transparency with regard to the procurement of equipment and parts while modernizing Japan’s defense capability. In addition, we will review all budget items, including the cost of host-nation support for U.S. forces stationed in Japan and personnel expenses, without regarding any item as a sacred cow.

As for public works spending, while curbing overall expenditures, we will take measures to thoroughly reform the cost structure and the bidding and contract systems, for example. At the same time, we will place priority on projects to support voluntary, strategic efforts to achieve self-sufficiency and revitalization of regions and projects that will make direct contributions to the public’s safety and security.

Regarding overseas economic assistance, we will secure an appropriate volume of ODA activities while continuing reform in this area through measures such as careful selection and prioritization of spending items.

With regard to small and medium-size enterprises, in order to revitalize such enterprises and reinvigorate regional economies, we will place priority on measures to strengthen the foundation of financing for them, promote appropriate deals with subcontractors, support the succession of business ownership, and promote collaboration between agriculture/forestry/fisheries and commerce/industry.

As for energy-related expenditures, we will curb overall special-account expenditures as part of the special account reform and place priority on measures to secure stable energy supplies and tackle the problem of global warming.

Regarding the agriculture, forestry and fisheries sectors, we will implement measures to cope with a variety of impending tasks such as ensuring food safety and security, while maintaining support for core farmers with high motivation as a basic principle of our agricultural reform.

With regard to expenditures for maintaining peace and public order, we will place priority on measures to realize a safe and secure society, such as increasing public security-related personnel.

Concerning personnel expenses for central government public employees, we will achieve a net reduction of 4,122 in the total workforce of administrative organs, thus roughly doubling the number of staff reduced compared with FY 2007. Also, we will appropriately reflect the Reform of the Remuneration Structure in the budget.

Regarding special accounts, we will steadily implement the abolition and consolidation of such accounts based on the Administrative Reform Promotion Law and the Act on Special Accounts, thus reducing the number of special accounts by seven from the previous year to 21. Moreover, we will conduct an exhaustive review of special account expenditures from the viewpoint of seeking efficiency and promoting rationalization.

With regard to revenues specifically earmarked for road construction, we will enhance support for regional areas and proceed with the construction of roads that are actually needed in a carefully planned manner while keeping unchanged the rates of the road transport-related taxes with due consideration of the severe fiscal conditions, the importance of necessary road construction and the impact on the environment. At the same time, we intend to promote effective use of the existing network of expressways through measures such as cuts in the expressway tolls. Moreover, by reviewing the existing arrangement related to road construction-specific revenues, we will manage to secure a larger portion of the revenues used for general purposes in the FY2008 budget than that of the previous year’s budget to the extent that it can obtain the understanding of taxpayers.

As for the Fiscal Investment and Loan Program (FILP), we will make FILP projects more focused and more efficient while allocating funds where necessary for policy implementation. As a result, the total volume of FILP projects in FY2008 will decline by 2.1% from the previous year to 13,868.9 billion yen.

With regard to national properties, we intend to promote the relocation and redeployment of government buildings and housing based on the report compiled by the Advisory Council to Examine and Follow the Efficient Utilization of National Property. Moreover, with a view to realizing a “lean and efficient government,” we will continue to advance the Reform of Government Assets and Debts, such as introducing a bid scheme for utilizing private sector proposals.

The total amount of government bond issuance for FY2008 will stand at 126,290.0 billion yen, representing a decrease of 17,548.0 billion yen from FY2007 and marking the second straight year of sharp decline. This will be for the first time in eight years since FY2000 that the total amount of government bond issuance falls short of 130 trillion yen. Nonetheless, the amount of outstanding government bonds is expected to continue expanding and will stand at 553 trillion yen at the end of FY2008. As we must continue to properly conduct our debt management policy in coordination with fiscal management, we will aim to ensure smooth and stable financing and minimize medium- to long-term financing costs, and we will continue our efforts to issue bonds in ways that meet market needs and trends.

Regarding the FY2008 tax reform, in order to realize sustainable invigoration of economy and society, we will take measures for economic revitalization including the expansion of preferential tax treatment of research and development and the reinforcement of tax measures for small and medium-size enterprises, and will also take necessary measures with regard to the tax systems for financial and securities transactions, land and housing, etc.

In addition, in order to promote public interest activities undertaken by the private sector, we will take necessary tax measures in line with the reform of the public interest corporation system and revise the tax system for donation. At the same time, we will implement measures necessary for narrowing the gaps in fiscal capacities among regions.

Outline of Supplementary Budget for FY2007

Next, I will explain the supplementary budget for FY2007.

On the expenditure side, while maintaining the policy of not easing the reins of fiscal discipline, we will appropriate funds for disaster control measures and other essential and urgent needs and allocate additional non-discretionary expenditures with due consideration of the need to ensure the safety and security of people’s lives and cope with the crude oil price surge. Meanwhile, we will reduce local allocation tax grants by an amount equivalent to the decrease in the tax revenue and compensate for the tax grant reduction, and we will also cut back on fixed expenses.

On the revenue side, we project a decrease of 916.0 billion yen in tax revenue compared with the initial budget, while projecting an increase in non-tax revenue.

In light of the aforementioned factors, we have avoided treating the supplementary budget as an exception to our effort to achieve fiscal consolidation and decided against issuing new government bonds. As a result, the total amount of the FY2007 budget including supplementary measures will increase 895.4 billion yen from the initial budget to 83,804.2 billion yen.

Also, we will take supplementary steps with regard to the special account budgets and the budgets of government-affiliated agencies.

Japan's Current Fiscal Condition and the Government's Basic Approach to Fiscal Management

Now, I would like to state the current fiscal condition of Japan and the basic philosophy concerning the future management of fiscal policies.

Fiscal consolidation and stable economic growth constitute the twin pillars of the government’s economic and fiscal management.

In the draft budget for FY2008, we have curbed expenditures in each area in line with the policy of pursuing expenditure reform stipulated in “Basic Policies 2006.” Still, we have to cover expenditures worth slightly over 25 trillion yen, equivalent to about 30% of the total revenue in the general account budget, by issuing government bonds, which means that our fiscal condition remains severe. Meanwhile, at the end of FY2008, the outstanding long-term debts owed by the central and local governments are projected to total 778 trillion yen, which is equivalent to 148% of GDP, the worst level among major developed countries.

As the first step toward fiscal consolidation, we will continue to steadily work on integrated reform of expenditures and revenues so as to achieve a surplus in the primary balance of the central and local governments combined by FY2011, which is a target we have repeatedly pledged to the people to attain. After attaining this goal, we will aim to decrease the debt-to-GDP ratio in a stable manner toward the middle of the 2010s. To that end, we will thoroughly carry out expenditure reform in each area in line with “Basic Policies 2006.”

On the other hand, since we need to avoid adversely affecting the people’s lives by making necessary expenditure cuts, even after implementing expenditure reforms, we must secure a stable supply of revenue sources for any possible increases in the burden caused by social security services and the declining birthrate. Therefore, we will endeavor to realize fundamental reform of the tax system, including consumption tax, at an early date, in line with the government’s reiterated policy agenda and “the Basic Concept” of the Outline for Tax Reform compiled recently by the ruling parties.

Conclusion

We must boldly carry out necessary reforms without any delay, after taking a medium- to long-term perspective, looking ahead for at least 10 years from now, in order to consider how Japan’s economic and fiscal conditions will evolve amid the aging of the society due to the declining birthrate and continuing economic globalization.

Needless to say, the government’s fiscal condition should constitute the foundation of medium- to long-term growth of the national economy, thus ensuring the safety of the people’s lives. If questions arise as to the sustainability of the fiscal management, we will be unable to demonstrate the attractiveness of the Japanese economy to the global community. It will also raise concerns among our children and grandchildren about their future prospects. We will do our utmost to achieve fiscal consolidation, with a determination to restore the market’s trust in Japan’s fiscal policy and conduct fiscal management in ways that assume responsibility for future generations.

 

This concludes my explanations regarding the outline of the draft budget for FY2008 and the supplementary budget for FY2007 and the basic approach to future fiscal management.

It is critical to enact the budget for FY2008 and legislation related to tax system reform within the current fiscal year in order to ensure that right from the beginning of the new fiscal year, we can smoothly implement measures to maintain the public’s safety and security, revitalize regions and strengthen Japan’s growth potential. Therefore, I earnestly request the understanding and cooperation of the nation and of my fellow parliamentarians, from both ruling and opposition parties, with regard to the budget and the government's approach to future fiscal management.

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