II Individual Issues
For future fiscal reform, the government must review all annual expenditures, leaving no sanctuaries untouched. As part of this effort, it will be important for the government to reform social security, public investment and local finances, the three principal annual expenditure sectors. Therefore in this report, we shall address these three areas in particular and outline some basic approaches for reforms.
< Social Security >
As fewer children are born and Japan's society rapidly ages, social security benefits and the social security burden are projected to expand at a rate that greatly exceeds the rate of economic growth. On the other hand the circumstances surrounding social security, such as changes in the strength of the economy, Japan's serious fiscal situation and changes in the economic conditions faced by senior citizens, are changing substantially. Japan's government must undertake social security structural reforms in order to respond adequately to these changes and construct a stable, efficient system that is capable of serving its functions into the future.
To create a social security system that can continue to function in the future, Japan must use the individual self-help and independent mentality as a base to build a mechanism that balances the benefits and burdens between generations and achieves harmony between the social security system, the economy, and fiscal policy. A comprehensive point of view that spans systems will be required to meet this challenge, including 1) reviewing what benefits should be paid and making benefits more efficient so that their burden does not become excessive in the future, 2) impartially dividing the social security burden among all individuals according to their ability to pay, regardless of age, and 3) ensuring the system is efficient and provides high-quality service. When implementing reforms the government must give adequate attention to utilizing the vitality of the private sector by promoting further deregulation.
In the government's Ruling Party Social Security Reform Conference, Japan's government decided upon Guidelines for Social Security Reform that clarified social security reform concepts and basic thinking. The government must now pursue rationalization and efficiency improvements that will affect the entire social security system by starting social security reform in line with the "Social Security Guidelines", while referring to the approaches to social security reform adopted in various foreign countries.
1. Medical Care
Public medical care expenses, particularly medical care expenses for the elderly, continue to grow at a rate that greatly exceeds the expansion speed of Japan's economy. As long as this structural imbalance remains uncorrected, the future medical care expense burdens, especially those on working generations, will become excessive and could lead to the collapse of the entire public insurance system. Taking Government-Managed Health Insurance as an example, the reserve fund will dry up in FY2002 and the likelihood is that it will no longer pay medical care costs if the financial situation progresses in its present fashion. Moreover, large regional discrepancies in medical care costs within Japan or longer hospital stay, too many hospital beds per capita compared to other countries, suggest the existence of substantial inefficiency in the Japanese medical care system.
Japan's medical care insurance system over the past several years, experienced many ad hoc amendments nearly every year. Apparently, such situations show that the Japanese medical care system is losing structural stability, which augments people's uncertainty towards the future, and will damage people's trust in the system. Therefore rather than tinker with system reforms, addressing full-fledged structural reform from a viewpoint of building a sustainable medical care system is an important issue in the perspective of eliminating people's unease towards the future.
It need not be said that medical care reform should be compatible with the total financial reform plan of the national and local governments.
Based on the above discussion points, Japan must immediately establish a definite plan specifically aimed at realization of the following reforms in Fiscal 2002.
(1) First, it will be necessary to devise every conceivable measure aimed at improving efficiency and making medical care expenses and the medical care system more appropriate. Specifically,
1) Review the medical fee system and drug pricing system
Promotion of EBM (Evidence Based Medicine); for example, pushing standardization of medical care by drawing up diagnosis and treatment guidelines for specific diseases, reviewing procedures for claming medical fees (further expansion of coverage and fixed payments, introduction of diagnostic related groups-prospective payment system (DRG-PPS), etc.), the drug pricing system and medicine prescription and preparations system, etc.
Furthermore, medical fees and drug prices should be cut to the level which is consistent with the declining trends in wages and commodity prices over the past several years and the balance between medical care expenses and the entire economy or government's fiscal structures.
2) Improve the efficiency of the medical service supply system
Streamline the medical service supply system by reducing excess sickbeds, doctors and dentists, and 'high-cost' medical equipment. Particularly in regions with excess sickbeds, personnel or equipment, public institutions such as national or municipal hospitals should conduct a stringent role to alter this medical supply system in the region. In addition, prefectural governments, which are in charge of supervision and surveillance of medical institutes, are more actively involved in management of the medical care supply system.
Also study liberalizing participation in medical institution management and ownership.
3) Strengthening the Insurance Carrier Function
Take into consideration the fact that current circumstances have become a mechanism that limits insurers' discretionary power and inhibits insurers ability to demonstrate creativity, and provide an environment to strengthen that function (from the standpoint of enhancing medical institution evaluation and selection functions, remove the ban on direct contracts and discount contracts with medical institutions; from the standpoint of improving the efficiency of medical care statement examinations and payments, introduce competition and promote computerization (introducing digital statements, etc.) of these activities.
Review size and members of insurance groups (wider area for basic unit of national health insurance, localization, etc.).
4) Increase information disclosure and system transparency and promote computerization
Broaden and enhance information disclosure, including further disclosure of hospital records and claim statements, enhance third party evaluations, ease regulations on advertising, increase the transparency of medical care fee claim clerical work, etc.
Computerize medical care statement examinations and payment activity, computerize medical records, effectively utilize diagnosis and treatment information, etc.
5) Other
To meet various medical care-related needs, introduce a system with greater discretion on the earnings of medical institutions outside the public insurance system, and study the use of private insurance while reviewing the range of protection to maintain for public insurance.
Moreover, from the standpoint of appropriate coordination with long-term care insurance and medical care insurance with regard to long-term treatments, examine balance of the evaluations on fee schedules and the copayment levels between both long-term care insurance and medical insurance.
(2) Review what the burden should be from the standpoint of impartiality between generations and within each generation. With regard to the copayment on senior citizens in particular, the government should ask that they bear the same burden as working individuals following specific consideration for persons with a limited ability to shoulder the burden or individuals with need for frequent cares.
Moreover, to ensure impartiality of the personal burden within generations or as a personal burden procedure, the government should also study the introduction of a system for exemption from responsibility for medical care expenses up to a prescribed amount.
(3) Even if the government adopts all measures described above, the government may still be unable to radically solve the structural problem of disproportionate growth between medical care expenses and the economic trend. Therefore to correct the imbalance between medical insurance fiscal revenues and expenditures before it is too late and build a system that can be sustained without the need for frequent future adjustments, though insurance premiums should be raised to compensate for existing deficits, the government must introduce a new framework that will balance the growth in medical care expenses - particularly the expenses for elderly medical care - with economic growth. According to the report on the overseas surveys in Germany and France, a management policy for total medical care expense has a set effective function in some areas that contributes to the stabilization of insurance premiums. While referring to such an approach, the government should examine the introduction of a technique for controlling total medical care expenses in Japan based upon the people's consent. At such time it will be important to adopt the idea of setting the limits of medical care expense increases within the range of basic wage growth, as seen in the premium rate stabilization principle utilized in Germany (= expansion of insurance income).
(4) To ensure the quality of medical care a firm approach such as enhancement of medical care safety measures, which are of great concern to Japan's citizens, is probably necessary. In addition, while it need not be addressed in the first order of business as a medical insurance fiscal policy question, the problem of forming a national consensus on terminal care is an important issue.
(5) Furthermore, with regard to the construction of a new senior citizen medical care, some voices are insisting on immediate burden relief for medical insurers in the form of an increase in the public expense. This thinking fails to consider the necessity of sustaining the entire system, not merely the medical insurance system but the entire economy and government's fiscal structures as well. It is not a discussion topic that is consistent with the future restoration of national and local fiscal health. Likewise we should be careful to note that reform measures to shift the burden to specific insurance groups also will not contribute to an essential solution to the problem.
In any event, when building a new senior citizen medical care system, the government should pursue its investigations from a broad perspective that includes the function of health insurers and the proper role of insurance groups.
2. Long-term Care
For long-term care, the government took the view of integrating the separate old-age welfare and old-age medical care systems and introducing a mechanism by which the entire society supports long-term care for the elderly. Japan must continually make efforts for steady implementation of the long-term care insurance system implemented in April 2000.
In addition, the government must prepare steps that include promoting entry of private providers into care homes and other services as well as at-home care service, the use of group homes for elderly individuals coping with senility, deregulation of the requirements to establish facilities, ensuring the quality of care managers, increasing information disclosure, promoting broad-area alliances among municipalities, eliminating socialized hospitalization through appropriate collaboration with medical care, and ensuring the quality of long-term care services. Furthermore, from the standpoint of coordinating the overlap of pension benefits and long-term care benefits and ensuring a balance in the burden for facilities services and at-home care services, the government must review the ideal approach to the introduction of personal burden as to housing costs (the portion of expenses corresponding to housing) such as the costs for rooms in special elderly nursing homes.
3. Pensions
The government revised the pension system in 2000, and made changes for the future such as restraining total benefits by 20%. Nevertheless, in order to cover the future increase in benefit amounts caused by the aging of Japan's population, the government will have to greatly increase the burden on future generations. Japan still has not eliminated the sense of intergenerational equity or erased concerns over whether it will be possible to maintain the current system.
On the other hand, when we look at the economic realities of senior citizens in Japan today they generally are no worse off in terms of income flow than working individuals, and in terms of assets they are in better shape. A Basic Pension's level exceeds average basic consumption expenditures, and Employee's Pension's level (the model amount) covers most consumption expenditures of elderly retired households.
Other advanced countries have reviewed pensions with a focus on the benefit side so that the burden on working individuals does not become excessive. Countries such as Germany, Sweden, and Italy have reviewed their pension systems with an eye to creating sustainable systems, on the prerequisite of retaining the present insurance premium level. These countries have reformed their pension systems to balance future benefit obligations and financial resources under the present burden level, as it would be under the reserve methods, while maintaining inter-generational support as a basis.
This approach has disadvantages, such as the difficulty of clearly showing the defined amount of future benefits ahead of time. But because it ensures long-term balance in pension finances and removes the concern created by defined benefit-type pension systems that future generations will be asked to pick up the increased burden as future benefits increase, it makes the relationship between inter-generation benefits and burdens both transparent and equal. An additional merit is that stable pension management is possible when the economy fluctuates and the population ages.
In Japan, the present pension insurance premium levels and national treasury burden have created a situation that can only provide about 3/4 of the future benefit amount. If Japan maintained the present benefit levels and converted the system to a full reserve system, the reserve shortfall burden corresponding to past periods would realize as a burden on the current population (for example, roughly 330 trillion yen for the portion proportional to the welfare pension, for example). However, this problem is the burden caused by the management of the current system. This obligation is impossible to avoid, regardless of the directions of reform enacted. Thus when undertaking pension reforms, the government must expressly address this problem and proceed with its study from the viewpoint of achieving fair pension benefits and burdens between generations and providing a long-term equilibrium in pension finance.
Given the above for the public pension, the government should plan for the next fiscal recalculation in 2004 and set the objectives for reducing or eliminating the pension liability that is planned to be financed by the future increase of contributions (about 530 trillion yen for the welfare pension and roughly 60 trillion yen for the public pension) and establishing impartiality in inter-generational benefits and burdens. By focusing on the control of benefit levels as explained below, including a review of what the benefit levels should be, the government must restructure the pension systems that is sustainable throughout one future. In addition, quickly abolishing the freeze on insurance premium increase, re-examining the pace of future insurance premium hikes and determining what future reserve fund levels should be, are also necessary to restrain the increase in the burden on future generations as a whole. Furthermore, in order to be able to maintain the insurance premium levels required by the system in the future, it will be preferable for the government to not make frequent system revisions. The government should also investigate mechanisms that will automatically adjust benefits and maintain long-term pension finance equilibrium in response to changes in system prerequisites, such as economic growth, the birthrate and average life expectancies.
With regard to how what benefits should be, it will be necessary to maintain an impartial viewpoint between and within generations. Measures should include revision of benefit design in line with the changing forms of men and women's work, sweeping review that comprehends the realities of senior citizen households, and revision of benefits towards senior citizens who receive working income. The present tax system should also be revised from the standpoint of fairness between generations and establishing the appropriate burden through contributions, investments and benefits.
There is also a need to review the pension system so it corresponds to the changes in Japan's social and economic realities. This includes looking at ways to adapt the system to greater lifestyle alternatives for women and the diversification of family arrangements (review of the system for the Category-3 insured, individualize the account for pension) or broadening application of the welfare pension system to individuals such as part-time workers, based on the proliferation in forms of employment.
To make it possible for elderly individuals to make their living with a combination of public pension and self-help efforts (such as work income, private pensions and savings), the government should quickly enact and smoothly implement the Defined Contribution Private Pension Bill (Japan 401k) and the Defined Benefit Corporate Pension Bill, and promote the spread of new vehicles such as the so-called "reverse mortgages".
Ensuring trust in the system is vitally important as a prerequisite for radical reform. It will be necessary to be mindful of the strict operation of the present system. From this standpoint, Japan will have to appropriately manage the current system, while enhancing efforts to create greater understanding of the pension system among young people. This includes strengthening measures against nonpayment and/or non-participation in the national pension, starting by taking legal measures against non-payments, and lowering the pension amount in line with drops in the general level of prices (implement the automatic price indexation stipulated in law).
With regard to raising the ratio of treasury burden towards basic pension from one third to one half, the government must, while considering the consistency of policy goals and the restoration of the government's fiscal consolidation, investigate the matter together with specific measures to ensure stable funds necessary for the increase of burden ratio, as set forth in the Year 2000 Pension Reform Law Supplemental Clause.
4. Child Care Services
As part of the measures to support parents' ability to both work and raise children Japan has been taking steps to ensure a variety of childcare services to meet users' needs. This effort, based on the New Angel Plan, includes expanding the child care service for very young infants, promoting extended child care, and deregulation. It will also be necessary, however, to undertake additional steps, including the placement of wait-listed children at day-care centers and increasing the day-care system to accept children after regular school hours.
In the U.S. and European countries, a variety of organizations including private firms participate in providing child care services such as day-care centers. Japan must also promote effective thus efficient child care measures, such as expanding users' options, improving the quality of services, increasing efficiency by promoting direct participation of private firms or private management of public facilities, making day-care center capacity flexible, applying less rigid guidelines such as accepting children throughout the year, promoting further deregulation, charging proper burden on parents who use child care and making more appropriate use of public facilities such as empty classrooms at elementary schools.
5. Employment
Japan must respond appropriately to the pain that will accompany structural reform. Government promotion of employment measures is therefore an important policy issue. In this case, the structural reform of labor markets at companies, including work practices such as lifetime employment and the seniority system, will change as well as structural reform progresses. Future employment measures must address this change. In other words the employment measures to cope with structural reform must enable workers who lose their jobs to find alternative employment within a short period of time. It will therefore be necessary to implement policies such as
- Creation of new business activities that will create new jobs, including the promotion of regulatory reforms in sectors such as welfare, etc.
- Structural reform of labor markets through broad-scale deregulation
Moreover, to provide an employment safety net for this purpose, the recently enforced Revised Unemployment Insurance Law provides lenient job seekers' unemployment insurance benefits to middle-aged and senior workers forced into unemployment and faced with a severe employment situation. It will be important to smoothly enforce this measure and also necessary to appropriately devise budget measures for that purpose.
The government must exercise caution, however, with regard to any discussion to either extend the number of days for paying job seekers benefit under unemployment insurance or expand measures related to job skills development, because of the following problems from the standpoint of preventing negative effects such as a moral hazard.
(1) Merely extending the number of days for payment of job-seekers' benefits under unemployment insurance is inappropriate because it may tempt unemployed individuals to remain unemployed while they can collect benefits.
(2) From the viewpoint of efficiency, it is necessary to review job skills development in the direction of implementing such programs effectively:
1) Focus on the individuals attending the training and demand more personal accountability,
2) Ensure that the education and training content is actually linked to finding new employment.
1. Issues Concerning Public Investment
Infrastructure created through public investment during Japan's postwar reconstruction period, the years of fast growth and the era of stable growth has made a major contribution to the development of various economic activities and improved the quality of national life. Today, however, many doubts have surfaced regarding the effects of those infrastructure, the goals of such activity and how the creation of social capital should be implemented.
In light of these doubts, when reviewing the ideal role of infrastructure construction as part of reforming Japan's economic and fiscal structure, we should be aware of the four major issues of 1) correcting the scale of public investment, 2) promoting efficiency improvements and greater transparency of infrastructure activities, 3) placing greater focus on budget allocations and 4) reducing public construction costs.
2. Levels of Public Investment
It has been pointed out that in comparison with the U.S. and European countries, Japan's development of social capital has been slow. But Japan has steadily raised the level of its infrastructure by maintaining a consistently high investment rate for most of the post-war period and improved its social capital in various sectors until it rivals the circumstances in the U.S. and European countries. Moreover, compared with the post-war reconstruction years and the high-growth period – times when Japan's stock of infrastructure was absolutely insufficient – now that the pace of infrastructure formation is suitably advanced, the need for infrastructure development and the results achieved from such development are also diminishing.
In addition to this point, given that it faces the most serious fiscal circumstances of any advanced country, Japan has reached a time when it should reduce the pace of infrastructure development as a whole, continuing to invest steadily in the future, in only those sectors where infrastructure improvement is truly needed. The government should reduce in phases, the proportion of Japan's economy accounted for by public investment (the ratio of Ig/GDP), with the intermediate objective of bringing this ratio in line with the levels seen in the U.S., Europe and other advanced countries. The government should begin this effort in the budget for Fiscal 2002.
Japan must recognize that this kind of correction in the scale of public investment will help revitalize the entire economy and promote efficiency improvements through changes such as shifting various resources from low-productivity to high-productivity sectors.
3. Increasing the Efficiency and Transparency of Investment Activities
In recent years, the government has been using a uniform approach for public works aimed at establishing an "activity evaluation system" centered on cost-effectiveness analysis and re-assessment systems and proper management. In the future, the government should further promote efforts such as the development and extensive use of cost-effectiveness analytical techniques and public disclosure of evaluation contents and data, and should maintain a high level of transparency in the public works execution process, while eliminating public works that show scant investment results and overlap among activities.
In order to achieve the objective of uniform administration of public facilities such as sewage treatment plants, where multiple activity techniques exist, it will be necessary to respect the intention of local areas with regard to the selection of activities and give adequate consideration to fiscal policy costs. Moreover, it will be important in the future to narrow down the number of locations for public works through efforts such as restraining new choices to the extent possible, and to quickly achieve a shift towards emphasizing highly effective infrastructure works and investment performance.
Beginning with large-scale projects, for public works implemented using contracted capital such as public corporations, it will be necessary from the viewpoint of capping future increases in the national burden and ensuring fiscal transparency, to always confirm each project's true need and its revenue and expenditure accounting, review maintenance schemes to the extent necessary, and sharply reduce or halt some projects depending upon circumstances. We believe the government must take into consideration at that time the change in socioeconomic circumstances in recent years, including lackluster economic growth and Japan's declining birthrate and aging population, and must also reexamine the ideal nationwide, comprehensive development plan.
4. Prioritizing the Public Works Budget
Recently, the government has shifted the focus of sectors receiving public investment from all sectors in general, to those corresponding to the issues that directly confront public policy, such as economic structural reform, the aging of Japan's population and coping with environmental problems. In the future the government should continue to provide greater emphasis on budget allocations for those sectors that will contribute to socioeconomic development in the 21st century.
The specified revenue system has the function of ensuring that comparatively stable fiscal capital is available for sectors that are normally highly crucial. On the other hand, there is danger that these funds may distort the appropriate distribution of resources and lead to fiscal policy rigidity. Therefore, when acting to correct and focus on the size of public investment, the government should review the specified revenue system now in place including the road specific funds, based on the perspective of achieving more effective use of fiscal capital when faced with critical fiscal circumstances. In relation to this the government should also examine the proper approach for the current public works-related long-term plan that specifies the investment in each facility.
Based on demands to implement public works that are rooted in the concept of local independence and on calls to reduce the central government's organizational structure and clerical activities, the government has recently undertaken efforts such as broadly raising the selection criteria for direct public works control and creating and expanding integrated subsidies for public works. In the future, the government must continue to clarify the division of roles between the central and local governments and put greater emphasis on the central government's role, and strive to implement public works that truly meet the citizens' needs.
5. Reducing Public Works Costs
Although various measures to reduce the cost of public construction have been devised for each stage of construction from planning and design based on the Action Agenda concerning Public Works Cost Reduction Measures, Etc. (April 1997), in the future, the government should strongly promote comprehensive cost reduction measures that take into consideration the "New Action Agenda" drawn up last year and pursue more efficient utilization of fiscal capital.
Moreover, given that public works are carried out using the people's tax payments, demand that such investments be properly implemented is very high. At a time when citizens are taking a hard look at bids and order placement for public construction, enforcement of the Law to Improve Public Works Tenders and Contracts the government should strive continuously to further improve bidding and ordering systems, as well as ensure strict and proper execution of various past measures.
1. How Local Governments should be Managed, and the Direction of Local Fiscal Reform
(1) The posture that local governments should adopt is likely to be a prerequisite in considering the direction for local fiscal reform. As a committee, we believe with regard to this point, that it is first important to create local regions where each group will sufficiently demonstrate its diverse individuality and creativity. To this end, local fiscal administration premised on uniform and balanced development throughout the entire country is inappropriate. Preferably, each local authority will throw off its reliance on the central government for annual revenues and expenditures, and work to establish a local system of fiscal administration that can provide administrative and financial management corresponding to local characteristics, using systems that are suitable for an independent authority, based upon residents' decisions concerning the levels at which respective benefits and burdens should be matched.
(2) From the standpoint of the above, we believe that local fiscal reforms should aim in the direction of :
1) Establishing a scale of maintainable fiscal administration by reviewing the roles of central and local government administration and limiting them to the minimum necessary.
2) Reviewing the roles among the central and local governments and reducing fiscal transfer from the central government to local governments, and making local governments autonomously manage their finances under a financial framework which establishes a clear relationship between benefits and burdens within each local public entity.
(3) On the other hand, upon conducting studies in this direction, the government should extend them to all administrative sectors and examine the details of each individual policy. The principal issue will be to conduct a broad and all-inclusive examination, in order to form a public consensus regarding the administrative level of national minimum the central government should guarantee, the administrative level of civil minimum that local public entities should minimally ensure for local residents, what the differences in public service levels between local regions should be, and how responsibilities between the central and local governments should be allocated.
2. Approach Required for the Consolidation of Local Government Finances
(1) Local financial administration has deteriorated rapidly in recent years. The main cause was the expansion of local government annual expenditures at a pace faster than the central government, even as local tax revenues stagnated. Borrowing from the local allocation tax special account, and local bond debt has been rising.
The primary causes of this ballooning of local finances have been, from the standpoint of economic stimulus measures, a quantitative expansion problem stemming from growth in local independent activities and a problem in the degree of freedom of annual expenditures caused by central government measures that obligate local spending. Added to this are the breakdown in the relationship between benefits and burdens because the local allocation tax has the function of guaranteeing financial resources. The moral hazard created by guarantees of regional annual expenditures that greatly exceed the civil minimum and the incentive inherent in the local allocation tax system to increase annual expenditures have also been pointed out as causes.
(2) Therefore when acting to restore local finances towards fiscal consolidation, it will be necessary to undertake an approach combining cutbacks in local administration, reductions in central government participation in local finance, and reform of the local allocation tax system. With regard to the local allocation tax in particular, observers have noted that guaranteeing the financial resources required for standardized local administration through the calculation of standardized fiscal demand weakens the relationship between benefits and burdens for local residents and strengthens dependency on the central government. Two major issues to curtail this function, which guarantees financial resources, are likely to be the large-scale reduction of central government participation in local annual expenditures and the radical reform of the local allocation tax system.
For this purpose, the government will have to accordingly address the following:
1) Reduce the scope of fund guarantees using local allocation tax grants in proportion to cutbacks in central government participation.
2) Review investment in local independent activities with a large gap between the local fiscal plan and results, and review local current expenditure from the viewpoint of creating the proper civil minimum, and reduce the scope of financial resource guarantees using local allocation tax grants
3) Review systems to increase the incentive for various local public entities to review annual expenditures by bringing the local allocation tax grant system closer to the system used only to adjust uneven distribution of tax resources
These steps should be taken quickly to make the move towards an independent and sustainable local finance.
3. Measures that are Required Immediately
(1) To make it possible to move to an independent and sustainable local fiscal administration as proposed above, it is first and foremost indispensable to immediately reduce the yawning gap between annual revenues and expenditures, a financial resources shortfall that exceeds 10 trillion yen on a local finance planning basis just at the local level. As the preparation stage for drastic reform geared towards local independence, the government should examine combining the same approach and consistency at the central government level with an indication of the medium-term local finance measures aimed at local financial structural reform.
(2) Moreover, to reduce central government participation, the government should resolutely proceed with the adjustment and rationalization of central government subsidies. In addition, when examining various central government policies, the government should bear in mind ideas for increasing the amount of freedom local organizations have over annual expenditures, such as reviewing prescribed personnel standards.
(3) It has been pointed out that measures to distribute local allocation tax additions (revisions for project expenses, etc.) for the local burden towards specific activities or measures to calculate local allocation tax additions (phase revisions, etc.) for small-scale entities that will experience relatively higher administrative expenses, are an incentive to increase annual expenditures and a cause for continuation of inefficient annual expenditures. The government should review such additions' calculations, including their possible future abolition. The government should also immediately make simple standards for the local allocation tax calculation such as population and area.
(4) Relationship to the Fiscal 2002 Budgetary Process
Keeping in mind that the approach to restore central government finances towards consolidation will be through "setting central government bond issuance in Fiscal 2002 at 30 trillion yen or less and thoroughly reviewing annual expenditures," the government should take the first steps to return to sound fiscal administration beginning with the Fiscal 2002 budget, based on the orientation of the reforms outlined above. For this purpose, the government should review local annual expenditures and leave no areas untouched (including adjusting local annual expenditures that exceed the national minimum or civil minimum to an appropriate level), and from the viewpoint of increasing efficiency restraining local allocation tax grants by reviewing standard fiscal demand, reviewing local fiscal plans and taking the following actions:
1) Reduce central government participation, such as reducing the local burden when reviewing central government annual expenditures
2) Reduce local independent expenditure
3) Review the local allocation tax system such as the revision for project expenses and phase revisions
In this Preliminary Report we have outlined the characteristics of Japan's fiscal administration structure and the ideas that will form the basis for thinking about what that future structure should be.
With the support of the Japanese people, the Japanese government is now beginning efforts aimed at various reforms, including fiscal reform.
Since the former Fiscal System Council, the reforms that this council has repeatedly asserted are those that finally are about to be realized. This committee also welcomes this movement, and wishes to utilize the discussions accumulated over many years for this opportunity.
Fiscal reform is an important reform that is connected directly with the national life of Japanese citizens, now and in the future. When drawing up the reform plan, the government must investigate the issues from every angle, look at both benefits and costs, and undertake reforms that taxpayers (citizens) will sufficiently understand and accept. Given Japan's current fiscal situation, reform will span a long period of time. In order to continue the reforms and overcome unexpected circumstances such as a depressed economy spanning the business fluctuations over this period, the preparation of what we might call a "flexible structural reform plan" with elastic, changeable alternatives will be required. Furthermore, it is necessary to recognize that to the extent the Japan delays the start of reform, the cost to the Japanese public will climb.
Fiscal reform will be coupled with the final resolution of non-performing loans in the financial system and construction of a competitive economic system. While few would argue that fiscal reform would undoubtedly contribute greatly to the long-term rejuvenation of the Japanese economy, there are also voices expressing concern about the short-term effects on business. The government must persuasively explain to the people of Japan how these reforms will overcome this short-term effect. At that time it will be important to clearly present the state of the economy and society when the reforms are implemented.
The Council on Economy and Fiscal Policy will shortly complete work on its so-called "solid policy framework", the basic policies concerning structural reform. As a final note, this committee wishes to add that the committee is willing to aggressively participate in the creation of specific fiscal reform measures that will be fully implemented, after the announcement of this program.