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Speech on Fiscal Policy by Minister of Finance Noda at the 177th Session of the National Diet

January 24, 2011

Before requesting deliberation on the draft budget for FY2011, I would like to state the basic philosophy underlying the government’s fiscal policies and provide an outline of the draft budget.

(Challenges facing Japan and measures to stimulate growth)

The Japanese economy has got over the financial crisis triggered by the Lehman shock, but is now in a difficult situation such as a high unemployment rate, particularly among younger people. Besides this, we are still in a deflationary phase, and we need to keep a careful eye on the risk of downward pressures on the economy, such as the appreciation of the yen and developments in the world economy.

Meanwhile, problems such as birthrate decline, population aging and shrinkage of the working population continue unabated. Moreover, Japan’s fiscal situation grows increasingly harsh, and an overdependence on government bond issues has now become difficult to sustain. To overcome these difficulties, we now face public demands for an overhaul of fiscal policy under political leadership.

To meet these demands, we need to make effective use of limited fiscal resources, present useful ways of spending wisely and implement bold policies, under political leadership based on solid strategies. Robustly promoting economic growth, fiscal consolidation and social security reforms is the top priority task for the sustainable growth of Japan, and the government will make concerted efforts to this end. Also, to overcome deflation, we will continue to work closely with the Bank of Japan in tackling strong and comprehensive policy efforts.

For Japan to be successful and achieve growth in the global community, I think we will need to make our country more open to the outside world. While placing emphasis on the revival of agriculture, therefore, we will pursue efforts aimed at high-level economic links with other leading nations. We will also take steps to smooth trade procedures, for example, by improving procedures for exports, such as allowing exporters to declare to Customs before putting goods in bonded areas, holding policy talks with other Asian countries, and so on.

Besides these, it will be also important to harness the remarkable development in Asia and elsewhere for Japan’s own growth by, among others, enhancing overseas operations in the infrastructure sector. A massive infrastructure demand is now anticipated in various countries, but if we are to survive against vigorous international competition, united efforts by public and private sectors will be indispensable. For the government’s part, we will make maximum use of JBIC and other related institutions to this end.

Therefore, as well as making capital provisions for these institutions, we will take steps to strengthen the functions of JBIC through its spin-off from the present entity, thereby ensuring the independence and transparency of its fiscal administration and strengthening its operational efficiency, professional expertise, and so on.

Also, as the second largest shareholder of the IMF and the World Bank Group, we aim to incorporate development of the world into our own growth by actively contributing to the early realization of capital increases, thereby allowing these institutions to expand their financial foundations.

We will therefore make preparations for drafting the requisite bills on this strengthening of JBIC functions and the additional subscription to the IMF and the World Bank Group.

(Outline of the draft budget for FY2011 and revision of the tax system)

Next, I will give an outline of the draft budget for FY2011 and revision of the tax system. As well as adhering to fiscal discipline based on our “Medium-term Fiscal Framework”, the draft budget for FY2011 is designed to “Rejuvenate Vibrant Japan” by placing emphasis on growth, employment and people’s lives, while steadily implementing the “New Growth Strategy” and major policies of the Manifesto Roadmap. Primary balance expenditure will be 70,862.5 billion yen, a decrease of 69.4 billion yen compared to the previous year’s initial budget.  The general-account budget including a National Debt Service of 21,549.1 billion yen will total 92,411.6 billion yen, an increase of 112.4 billion yen from the previous year’s initial budget.

Turning now to revenues, tax revenues are expected to reach 40,927.0 billion yen, an increase of 3,531.0 billion yen compared to the previous year’s initial budget. Other revenues are expected to be 7,186.6 billion yen, including receipts of 2,489.7 billion yen under special acts designed to keep the government’s financial contribution to basic state pensions at 50%.

Despite the sustained low level of tax revenues, new issues of government bonds will amount to 44,298.0 billion yen, following maximum efforts addressing both expenditure and revenues.

I will now explain the main items of expenditure.

As social security expenditure, we will continue to increase spending on pensions, medical care and others related to population aging, etc. As well as this, we will raise the amount of child allowance for children under the age of three and create a system of support for job applicants in order to widen the employment safety net. We also plan to enhance measures such as Life Innovation projects and employment support for new graduates, as a way of boosting growth and employment. This will create an increase of around 1,400 billion yen compared to the previous year’s initial budget, far greater than that for other expenditure items.

As expenditure on education and science, we will promote improvements to educational environments, such as steadily implementing effectively free education in public senior high schools, reducing elementary school 1st grade classes to 35 pupils or less, and taking steps to strengthen infrastructure for education and research in universities. We are also increasing the amount spent on promoting science and technology, with priority allocation for creating funds that contribute to enhancing fundamental research, leading-edge R&D in Green Innovation, Life Innovation and other sectors, and so on.

For local fiscal administration, we plan to allocate an additional 1,050 billion yen to reflect shortfalls in local finances, while maintaining the principle of keeping local expenditure in line with that of the central government. As a result, local allocation tax grants, etc., will be 16,784.5 billion yen, a reduction of 693.2 billion yen compared to the previous year’s initial budget, although the total amount of local allocation tax grants distributed to local authorities will increase for the 4th straight year. Meanwhile, we will take appropriate steps to secure the total amount of general fiscal sources needed for stable operation of local finances. In these and other ways, we will continue to pay maximum consideration to local regions.

On national defense, our aim is to make expenditure more rational and efficient through measures such as reducing costs. We will also take steps to develop a dynamic defense capability with particular priority on immediate response and mobility, based on the formulation of new National Defense Program Guidelines and a Mid-Term Defense  Program.

On public works expenditure, we will continue to pursue radical revisions of large-scale public works while taking steps to increase rationality and efficiency through even greater selection and concentration, as well as rigorous cost reduction. We will also ensure that budget allocations are diverted to genuinely necessary social infrastructure improvement, among others.

On economic assistance, we are taking steps to secure the project volume of all ODA subject to international evaluation, while reviewing projects and strengthening prioritization measures.

As measures for SMEs, we aim to prioritize support for overseas strategies by SMEs, support for R&D, measures to facilitate financing, and other efforts designed to stimulate SMEs, while also supporting SMEs in raising the minimum wage.

In expenditure on energy, our priority is on measures such as projects to promote energy saving, which will play a central role in efforts to combat global warming.

As concerns the budget related to agriculture, forestry and fisheries, we will expand the system of individual (household) income support for agriculture from rice to field crops, stabilize agricultural business and secure domestic production capacity. As well as these, we plan to introduce measures such as increasing allocations for further expansions in scale, and to take the first step towards strengthening the agricultural structure.

In the budget related to public order, our priority is on materializing a society in which people can live in safety and reassurance, starting with increased allocations of public order personnel. With regard to personnel costs for public servants, the budget will accurately reflect a decrease in salaries through salary reviews, a net decrease in staffing, and others at both national and local level. As a result, personnel costs for national public servants will be reduced by 19.0 billion yen from the previous year’s initial budget to 5,106.5 billion yen. Meanwhile, we will create Strategic Grants for Regional Autonomy and others aimed at costs related to investment in prefectures, in order to harness local knowledge and creativity and expand the freedom of decision-making at local level.

In the  Fiscal Investment and Loan Program for FY2011, we plan a reduction of 18.8% from the previous year’s initial program to 14,905.9 billion yen. We will achieve this by properly addressing the demand for funds in line with the “New Growth Strategy”, among others, while taking steps to prioritize targeted projects and increase their efficiency.

The total issuance amount of JGBs, including refunding bonds and FILP bonds, will be 169,594.3. billion yen, marking an increase for three consecutive years. With the large debt outstanding, we aim to secure market credibility by maintaining fiscal discipline, as well as continuing to be engaged in proper debt management policies with JGB issuances in line with market needs and trends identified through close dialogue with the market.

In the FY2011 revision of the tax system, we will make it our particular priority to tackle issues such as economic revitalization, the recovery of tax redistribution functions, and global warming countermeasures, in response to the current harsh economic and employment situations. This will be done under a framework of concerted efforts to promote economic revitalization and fiscal consolidation aimed at achieving radical reform across all areas of taxation, including income, consumption and assets. At the same time, we will approach reforms from the perspective of taxpayers and consumers, etc., and will implement reforms with a high level of urgency, as part of a radical reform of the tax system. In concrete terms, we plan requisite measures such as lowering the effective corporate tax rate and the preferential corporate tax rate for SMEs, creating systems of taxation to enhance employment and environment-related investment, revising the various deductions of income tax, revising inheritance and gift tax, introducing carbon dioxide tax as a global warming countermeasure, expanding the tax system for nonprofit organizations and facilitating tax compliance and enforcement.

(Challenges for Medium-Term Fiscal Management)

Finally, I would like to speak about our response to the challenges facing medium-term fiscal management, among other issues. At present, Japan’s fiscal situation is at a worse level than any other major advanced country, with the balance of long-term debt by central and local governments expected to reach 184% of GDP by the end of FY2011. Fiscal consolidation is a challenge that we will inevitably face, whatever the composition of the Cabinet. Last June, we indicated the path to fiscal consolidation in our “Fiscal Management Strategy”, in which we set the targets of halving the ratio of fiscal deficit to GDP by FY 2015, and turning it to a surplus by FY 2020. To realize the people’s security amid declining birthrates and an aging population, the Cabinet reached a decision on Basic Principles of Social Security Reform in December last year. In the Principles, the government and ruling parties set out to formulate a reform plan to strengthen the social security system and to identify the financial resources needed for the reform, and also put forward a tax reform agenda which aims to secure the financial resources needed as well as to achieve fiscal consolidation simultaneously. Furthermore, the final reform plan including a roadmap will be formulated by the middle of 2011, and the government and ruling parties will realize the reform plan after reaching a consensus.

To realize this reform, I think it requires people’s understanding and cooperation based on broad-ranging discussion, regardless of their position. I would also be glad of the active participation of other political parties in this discussion.

(Conclusion)

This concludes my explanations of the government’s basic approach to fiscal management and the draft budget for FY2011.

The passage of this budget by the end of this fiscal year is crucial to the implementation of measures directly linked to people’s lives from the beginning of FY 2011. I hereby request that the Diet deliberate on the budget and related bills and promptly give its approval.

Japan currently faces some difficult challenges, including deflation and population shrinkage. By opening up a path to solving them, we will be able to show the world a new paradigm for economy and society. If the people of Japan all join forces to challenge these tasks with a single will, we should definitely be able to overcome the difficulties we face. I personally intend to devote every ounce of effort to identify the path to resolving these issues, putting Japan back on track for growth, and making this a country of which we can continue to be proud.

I sincerely ask for the understanding and cooperation of all the people of Japan.

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