Speech on Fiscal Policy by Minister of Finance Aso at the 186rd Session of the National Diet

Before requesting deliberation on the draft supplementary budget for FY2013 and the draft budget for FY2014, I would like to state the basic philosophy underlying the government’s fiscal policies and provide an outline of the draft budgets.

During its first year, the second Abe Cabinet sought to promptly extricate Japan from deflationary stagnation and to revitalize the economy by strongly promoting an integrated “three arrows” strategy comprised of the “Aggressive Monetary Policy,” “ Flexible Fiscal Policy” and “Growth Strategy for Promoting Investment.” These policies have already taken effect, and the Japanese economy is steadily looking up. For instance, real GDP has registered four consecutive quarters of positive growth, and commodity prices have remained firm.

The first thing we need to do is to take these movements toward economic recovery and these expectations for an exit from the deflationary stagnation, and link them to a stable growth trajectory. To this end, we will accelerate and enhance the implementation of the Japan Revitalization Strategy, which is the government’s “third arrow” for reviving the Japanese economy. At the same time, the government, business managers and workers will, while continuing to perform their respective roles, work with each other in advancing efforts based on the report of the Government-Labor-Management Meeting for Realizing Virtuous Cycles of the Economy. It is important that this leads to the realization of virtuous economic cycles, that is, linking increases in corporate earnings to higher wages and greater employment and investment, and then through increased spending and investment, stimulate further growth in corporate earnings.

Through these initiatives, we will restore a robust economy, which is also the basis for premium income and tax revenue. In addition, by raising the consumption tax rate, we will secure stable financial resources for social security, and we will build a sustainable social security system to hand down to the next generation.

We will implement measures, not only to alleviate any reactionary impact and to address the risk of an economic downturn when the consumption tax rate is increased in April this year, but also to realize an increase of the economic growth potential and virtuous cycles leading to sustainable growth of the economy. Specifically, based on the Economic Policy Package determined by Cabinet on October 1, 2013, we have established the “Economic Measures for Realization of Virtuous Cycles” and estimates for the FY2013 Supplementary Budget. In conjunction with the FY2014 Budget and Tax Reform, we will also make steady progress in initiatives for mitigating the impact, together with measures for pass-through of increased consumption tax.

In order to facilitate the monetary easing currently undertaken by the Bank of Japan, and also in order to continue realizing sustainable economic growth led by the private-sector demand, it is important to maintain the credibility of Japanese public finance. The fiscal situation in Japan, however, has continued to worsen due to such factors as the deflationary stagnation, an aging population and falling birthrate. On top of that, the response to the economic crisis following the collapse of Lehman Brothers has resulted in the situation deteriorating even further in recent years. Whether viewed historically or in comparison with other countries, the situation in Japan is extremely severe. We need to dispel people’s uncertainty for the future by securing the credibility of public finance, thereby maintaining sustained economic growth.

In view of these points, the government has set a fiscal consolidation target to halve the primary deficit of the national and local governments to GDP ratio by FY2015 from the ratio in FY2010 and to achieve a primary surplus by FY2020. In order to steadily achieve these targets, in addition to continuing to increase tax revenue, we will need to continually improve the efficiency of annual expenditure. Based on this approach, and in line with the Medium-Term Fiscal Plan, we will continue to exert our utmost effort both on the expenditure and revenue sides.

Next, I will outline the FY2013 Supplementary Budget submitted to the current session of the Diet for the purpose of implementing the “Economic Package to　Activate Virtuous Cycles.

With respect to the “Economic Package to Activate Virtuous Cycles,” we are scheduled to disburse a total of 5.4744 trillion yen in the general account. In detail, we have allocated 1.3980 trillion yen for expenses related to “measures to strengthen competitiveness”; 300.5 billion yen for expenses related to “policies for women, young people, the elderly and the disabled”; 1.1958 trillion yen for expenses related to “acceleration of measures for reconstruction, disaster prevention and safety”; 649.3 billion yen for expenses related to “reduction in impact on low-income earners and families with young children, and mitigation of rush demand and recoil reduction”; and 1.9308 trillion yen as a transfer to the Special Account for Reconstruction from the Great East Japan Earthquake. In addition, we have also allocated 1.1608 trillion yen as local allocation tax grants, and 363.6 billion yen for other expenses including international contributions.

In order to fund these expenditures, on the expenditure side of the budget, we plan to decrease the amount of previously approved expenses by 1.5334 trillion yen, and on the revenue side of the budget, in addition to allowing for an increase in tax revenue of 2.2580 trillion yen and an increase in non-tax revenue of 369.4 billion yen, we have included a surplus from the previous fiscal year of 2.8381 trillion yen. Thus, we plan to secure financial resources for economic measures without issuing any additional Japanese government bonds (JGBs).

As a result, the general account budget for FY2013 will increase from the initial budget by 5.4654 trillion yen both for revenues and expenditures, amounting to 98.0770 trillion yen in total.

Necessary supplementary measures are also planned for the special account budget.

With respect to Fiscal Investment and Loan Program for FY2013, we have added a total of 130.8 billion yen in view of the Economic Measures for Realization of Virtuous Cycles.

Next, I would like to outline the FY2014 Budget and the FY2014 Tax Reform.

The FY2014 Budget is aimed at exiting from deflationary stagnation and achieving economic revitalization and fiscal consolidation at the same time. Combined with the FY2013 Supplementary Budget, we have prioritized the budget on such issues as investment for the future which will contribute to strengthening the competitiveness of Japan, and ensuring a sense of safety and security in a daily life protecting the foundations of life.

The FY2014 Budget is also the first budget realizing the Comprehensive Reform of Social Security and Tax. Utilizing the increase in consumption tax revenue, we aim to enhance and maintain social security.

Primary balance expenditure will be 72.6121 trillion yen, whereas total expenditures in the general account will be 95.8823 trillion yen, including 23.2702 trillion yen for national debt service.

With respect to revenues, tax revenues are expected to reach 50.0010 trillion yen and other revenues will add 4.6313 trillion yen. Government bond issues are budgeted at 41.2500 trillion yen, a decrease of 1.6010 trillion yen from the initial budget for FY2013.

As a result, primary balance of the general account will be improved by 5.2407 trillion yen, which is far above the target set forth in the Medium-Term Fiscal Plan of approximately 4 trillion yen in both FY2014 and FY2015.

Next, I will comment on our key expenditures.

With regard to social security expenditure, we will enhance social security by utilizing the increase in consumption tax revenue. Specifically, in conjunction with expanding the expenditures funded by the national portion of consumption tax revenue from the three expenses for elderly people to the four expenses for social security, we will implement measures which can directly benefit young people, women and the working generation, such as expanding childcare arrangements under the “Plan for Accelerating the Elimination of Children Wait-listed for Childcare,” and expanding the scope of refractory diseases for which patients can receive public support. Furthermore, when revising the medical treatment fees, drug prices will reflect market prices based on the results of the drug price survey. Moreover, we will promote reforms of the medical services in conjunction with the establishment of new subsidies for regional medical service, avoiding more burden on the nation.

Regarding expenditure for education and science, in addition to promoting university reforms and the development of global human resources for the future, we plan to enhance education support, including student loans, as well as measures to address the problem of bullying. As for the science and technology budget, in addition to creating a mechanism for reinforcing the government’s function as headquarters by enabling the Council for Science and Technology Policy to autonomously prioritize budget allocations in necessary areas, we plan to prioritize the budget to research and development in the medical field, taking into account establishment of a Japanese version of the National Institutes of Health (NIH).

In terms of local government finance, we have maximum consideration to local governments and secured the total general revenues deemed adequate for stable fiscal management, by increasing funding for enhanced social security. The total general revenues consist primarily of local tax revenues and local allocation tax grants, and local allocation tax grants are reduced reflecting the increase in local tax revenues.

Regarding national defense expenditure, as in FY2013, in line with the new National Defense Program Guidelines and the Mid-Term Defense Program, we plan to continue making enhancements from the perspective of strengthening surveillance and reconnaissance capabilities in the seas and airspace around Japan, and of strengthening crisis response capabilities for remote islands.

As for expenditure related to public works, while still keeping our investments prioritized and efficient, we plan to make efforts for social infrastructure improvements that are genuinely necessary for the purpose of addressing such issues as measures against aging infrastructure to protect people’s lives and lifestyles, and measures for disaster prevention and mitigation in preparation for a Nankai Trough earthquake.

With regard to economic assistance, we aim to secure the overall volume of ODA projects while promoting prioritization in areas that will also lead to sustained growth for Japan, such as support for the overseas expansion of Japanese enterprises.

As for expenditure related to small and medium-sized enterprises (SMEs), in addition to enhancing support for research and development in manufacturing technology, we plan to ensure the implementation of measures for SME financing as well as measures ensuring that the burden of consumption tax is passed on to customers.

Regarding expenditure for energy measures, in addition to prioritizing support aimed at developing domestic resources, securing rights in overseas resources, promoting energy conservation and expanding the introduction of renewable energy, we plan to promote nuclear regulation and nuclear disaster prevention measures, and to also grant funds to the Nuclear Damage Liability Facilitation Fund.

Concerning the budget related to agriculture, forestry and fisheries, for the purpose of strengthening competitiveness in this industry, in addition to reviewing the farm income stabilization program, we plan to accelerate the consolidation of farmland to responsible entities through the farmland re-distribution scheme, and to promote greater exports and the shift to a “sixth-order” industry.

As for the budget related to public safety, with an aim of realizing a society where people can live safely and securely, we plan to improve the foundation of police activities and enhance measures for the prevention of repeat offenses.

In terms of the personnel cost of national public servants, despite the end of the special reduction of salaries, the budget accurately reflects a reduction in retirement allowance and a net reduction in personnel through rationalization which are significantly larger than the targets set forth in existing plans.

With regard to recovery from the earthquake, in conjunction with the FY2013 Supplementary Budget, we are absolutely committed to accelerating the recovery and reconstruction of areas damaged by the earthquake. For this reason, in the FY2014 Special Account for Reconstruction from the Great East Japan Earthquake, we have allocated expenditure including 2.9543 trillion yen for expenses related to reconstruction from the Great East Japan Earthquake, 92.1 billion yen for the transfer to the special account for national debt consolidation fund, and 600.0 billion yen for the discretionary reserve for accelerating reconstruction and revitalizing Fukushima. As for revenues, we expect 738.1 billion yen from special taxes for reconstruction, 703.0 billion yen from the transfer from general account, 66.0 billion yen from other revenues, and 2.1393 trillion yen from reconstruction bonds.

With respect to the Fiscal Investment and Loan Program for FY2014, with an aim of breaking away from deflationary stagnation and revitalizing the economy, we plan to provide long-term risk money, etc. as a catalyst to the economy so as to appropriately address the challenges that it faces, such as for activating private investments, supporting SMEs making necessary efforts for improving their performance, supporting the expansion of activities by Japanese enterprises in overseas markets, and exporting infrastructures and securing natural resources. The total amount of the plan is 16.1800 trillion yen.

The total issuance amount of JGBs for FY2014, including refunding bonds, is planned to be 181.5388 trillion yen, the largest ever amount. With both the total issuance amount and the outstanding amount of JGBs climbing, we will remain committed to maintaining our fiscal discipline to secure market confidence and will soundly implement our debt management policy in government bond issuances reflecting market needs and trends, based on close dialogue with the market.

As for the FY2014 Tax Reform, we will implement tax measures aimed at ending deflationary stagnation and revitalizing the economy, as well as comprehensive tax reforms, and tax measures for supporting reconstruction from the Great East Japan Earthquake.

Specifically, with respect to promoting investment in facilities, promoting investment in R&D and to increasing income and consumption, we will implement tax measures that represent a quantum change from the previous policy. Based on these perspectives, we will introduce tax measures for promoting investment in facilities to improve productivity, expand investment promotion tax measures for SMEs, expand measures for the R&D tax credit, enhance tax measures for promoting expansion of income, abolish the special corporate tax for reconstruction one year ahead of schedule, and alleviate taxation on social and entertainment expenses. In addition, we plan to revise the deduction for employment income, adjust uneven local corporation tax, and revise taxation on automobiles.

This concludes my explanation of the government’s basic approach to fiscal management and the outline of the draft supplementary budget for FY2013 and the draft budget for FY2014.

The earliest possible passage of these budgets is necessary in order to break away from the deflationary stagnation and to put the Japanese economy on a firm course toward revitalization.

I hereby request that the Diet deliberate on these budgets and promptly give its approval.

During Japan’s long period of stagnation, dubbed the “lost two decades,” our country was affected by deflationary stagnation and was faced with an uncertain future, but we have at last started to see some promising signs. 2014 is an important year for effectively breaking away from the deflationary stagnation, linking recent economic recovery to sustained economic growth, and taking a steady step toward fiscal consolidation. By building economic foundations for truly addressing such structural change as an aging population, falling birthrate and globalization, and by bringing out Japan’s potential, I will also do my utmost to ensure we can materialize virtuous cycles of ending the deflationary stagnation, revitalizing the economy and achieving fiscal consolidation.

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