Speech on Fiscal Policy by Minister of Finance Aso at the 189rd Session of the National Diet

Before requesting deliberation on the draft budget for FY2015, I would like to state the basic approach underlying the government’s fiscal policies and provide an outline of the draft budget.

To revitalize the Japanese economy, the Abe Cabinet has been implementing the “three arrows strategy” of its economic policy package in an integrated manner. Under this policy, “virtuous economic cycles” are surely starting to turn, with a 22-year high active job openings-to-applicants ratio and a record-high level of corporate ordinary incomes. By implementing the “Immediate Economic Measures for Extending Virtuous Cycles to Local Economies,” we will deliver the benefits of Abenomics swiftly and broadly to local economies while responding to current economic conditions.

In addition, as an important task for the Abe Cabinet in its third year, we will devote earnest efforts to overcoming the population decline and revitalizing local economies and will encourage each region to form an autonomous, sustainable society by taking advantage of its own characteristics.

Meanwhile, in order to establish virtuous economic cycles, it is important to maintain the trend of wage hikes based on the consensus reached at the Seiroshi Meeting held late last year and to improve productivity and revise the wage system at the same time. We will also put the Japanese economy securely on the path of growth by boldly executing the growth strategy with an aggressive stance through the enhancement of corporate governance, reform of corporate taxation and abolition of so-called bedrock regulations.

To realize sustainable economic growth led by private demand and to smoothly promote monetary easing by the Bank of Japan, it is essential to maintain fiscal sustainability.

The Abe Cabinet has been steadily promoting fiscal consolidation, in addition to economic growth, through efforts made in terms of both revenue and expenditure. Therefore, in terms of revenue, we increased tax revenues by conducting initiatives to create a robust economy, and also raised the consumption tax rate to 8% in April last year in order to enhance and stabilize social security. In terms of expenditures, we have thoroughly reviewed, without any exception, expenditures in general, including a “natural increase” in social security expenditures. As a result of these initiatives, the issuance amount of JGBs under the budget for FY2015 will fall to the 30-trillion-yen range for the first time since the initial budget for FY2009 and the dependence on public debt issuance will decline to approximately 38%. The budget for FY2015 will also achieve the fiscal consolidation target for the year.

On the other hand, Japan’s fiscal condition is very severe, as shown by the accumulation of outstanding public debts to a level double the size of GDP. We must continue to make maximum efforts in terms of both revenue and expenditure.

We have decided to postpone the hike of the consumption tax rate to 10% for one and a half years as a result of taking comprehensive account of the economic condition and other factors. However, we will securely implement the consumption tax hike to 10% in April 2017, without introducing a provision that links the tax hike to the assessment of the economic condition, in order to fulfill our responsibility to pass social security on to future generations and secure the trust of markets and the international community in Japan. We will make every possible effort to ensure appropriate economic management with a resolve to create such a situation.

We will firmly maintain the goal of bringing the primary balance, including the national and local government budgets, into surplus by FY2020 and will formulate a concrete plan for achieving it by the summer of this year. When formulating the plan, we will further strengthen the initiatives so far conducted by the Abe Cabinet and will conduct study mainly on three pillars: a break from deflation coupled with economic revitalization, expenditure reform and revenue reform.

Through these initiatives, we will realize fiscal consolidation compatible with economic revitalization.

Next, I will explain the outline of the budget for FY2015 and the tax system revision.

The budget for FY2015, together with the economic measures, the supplementary budget for FY2014 and the tax system revision for FY2015, aims to achieve simultaneous economic revitalization and fiscal consolidation. It vigorously promotes efforts to deal with various challenges faced by Japan, including the revitalization of local economies and support for child care. It also features thorough prioritization and efficiency improvement of expenditures as a result of reviewing expenditures without exception, including a natural increase in social security expenditures.

Primary balance expenditure will be approximately 72.9 trillion yen, whereas total expenditures in the general account will be approximately 96.3 trillion yen, including 23.5 trillion yen for national debt service.

With respect to revenues, tax revenues are expected to reach approximately 54.5 trillion yen and other revenues will add approximately 5 trillion yen. Government bond issues are budgeted at approximately 36.9 trillion yen, a decrease of approximately 4.4 trillion yen from the initial budget for FY2014.

Next, I will comment on our key expenditures.

With regard to social security expenditure, we will launch a new child care support program in April 2015 by utilizing the increase in consumption tax revenue. We will also implement reform of the system to provide medical and nursing care services. When revising the nursing care service fees, we will curb the rise in the nursing care insurance premium and reduce the burden on users by lowering the overall fees while introducing additional fees for improvement of the treatment of nursing care staff and excellent services.

Regarding expenditure for education and science, in addition to promoting the development of global human resources and the reform of national universities, we will enhance such measures as interest-free scholarships and subsidies to cover the cost of encouraging entry into kindergartens. We will also promote innovation system reforms, including the creation of an international center for government-industry-academia joint research.

In terms of local government finance, we have given maximum consideration to local governments by increasing funding for enhanced social security with respect to their total general revenues while reducing local allocation tax grants, reflecting the increase in local tax revenues.

Regarding national defense expenditure, in light of the increasingly severe security environment surrounding Japan, we will allocate necessary budgetary funds based on the Mid-Term Defense Program so as to strengthen surveillance and reconnaissance capabilities and the capability to respond to attacks on remote islands. Moreover, we will also steadily promote the realignment of the U.S. military forces stationed in Japan in order to reduce the burden imposed by U.S. bases in Okinawa.

As for expenditure related to public works, we plan to make efforts for social infrastructure improvements that are genuinely necessary for the purpose of addressing such issues as disaster prevention and mitigation measures intended to protect the people’s lives and lifestyles, and aging social infrastructures, while continuing to keep our investments prioritized and efficient.

With regard to economic assistance, we aim to secure the overall volume of ODA projects while promoting assistance toward sharing of universal values such as the rule of law and democracy and assistance that contributes to the economic growth of developing countries and Japan.

As for expenditure related to small and medium-sized enterprises (SMEs), we will enhance support for research and development for innovative manufacturing technology and we plan to ensure the implementation of measures for SME financing.

Regarding expenditure for energy measures, in addition to prioritizing support aimed at expanding the introduction of renewable energy and promoting energy conservation, we plan to promote the development of domestic resources, securing of rights in overseas resources, and nuclear regulation and nuclear disaster prevention measures.

Concerning the budget related to agriculture, forestry and fisheries, in addition to promoting structural reforms, including consolidation of farmland to responsible entities through the farmland redistribution scheme, we plan to prioritize measures to strengthen the competitiveness of these industries, including the promotion of exports and the shift to a “sixth-order” industry.

As for the budget related to public safety, with the 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, the budget accurately reflects a salary revision, a comprehensive review of the salary scale and a net reduction in personnel.

With regard to recovery from the Great East Japan Earthquake, we will do our utmost to accelerate recovery and reconstruction in the areas damaged by the earthquake. Therefore, in the FY2015 Special Account for Reconstruction from the Great East Japan Earthquake, we project approximately 3.9 trillion yen in terms of each of revenue and expenditure.

With respect to the Fiscal Investment and Loan Program for FY2015, we plan to allocate a total of approximately 14.6 trillion yen in order to provide necessary funds mainly for SMEs and local governments.

The total issuance amount of JGBs for FY2015, including refunding bonds, will remain very high at approximately 170 trillion yen, so we will appropriately implement our debt management policy while maintaining our fiscal discipline.

As for the tax reform for FY2015, we will implement tax measures aimed at ending deflationary stagnation and revitalizing the economy, tax measures related to the revitalization of local economies, tax measures that take account of the change in the timing of the consumption tax hike to 10% and international initiatives such as the BEPS project and tax measures for supporting reconstruction from the Great East Japan Earthquake.

Specifically, we will encourage companies to enhance their profit-earning power and make active efforts to raise wages by expanding the tax base and lowering the tax rate as part of a growth-oriented corporate tax reform. Regarding the consumption tax, we have postponed the timing of the tax hike to 10% until April 2017. Moreover, we plan to extend and expand gift tax exemption related to housing acquisition funds and create a tax program to strengthen local business facilities.

This concludes my explanation of the government’s basic approach to fiscal management and the outline of the draft budget and tax reform for FY2015.

The earliest possible approval of the budget is necessary in order to achieve economic revitalization and fiscal consolidation at the same time.

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

The initiatives conducted by the Abe Cabinet so far have borne fruit, and the Japanese economy and the Japanese people are regaining hope and confidence. However, we are now entering the most critical phase for both economic revitalization and fiscal consolidation. The key to achieving these goals is for every member of this country to put their wisdom to use and work together to allow Japan’s potential to bloom and overcome the challenges faced by the country and its regions amid globalization and the Japanese population shrinkage. I strongly commit to fully devote myself to tackling the challenges with a resolve never to back down.

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