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5. Composition of the Budget

    Public Finance Law prescribes the composition of the budget to be submitted to the Diet. The budget consists of general provisions, a revenues and expenditures budget, continued expenses (multi-year expenses), approved carried-over expenses (expenses approved to be carried-over into the following year), and contract authorization.

(1) General provisions
    General provisions provide general rules to be commonly applied to all of the individual budget components. Also included in these provisions are the ceilings on the amount of government bonds as well as of Treasury bills and temporary borrowings, and other matters necessary for budget implementation. These provisions form the basic framework of the budget.

(2) Revenues and expenditures budget
    The revenues and expenditures budget is the main part of the budget. The revenue section shows the estimate of total national receipts, and does not mean that the government will collect the estimated amount of revenues. The expenditure section is different. Expenditures are permitted only when listed in this budget, and the estimated expenditures are basically the upper limits of expenditures for each budget item.

(3) Continued expenses
    Continued expenses contain items for which the government makes payments over a period of several years, the maximum period being five years. These payments are for projects in construction, production, and others. Prior Diet approval is required for a continued-expense item, and the Diet specifies the total amount of expenses as well as annual allotments. However, in recent years, continued expenses are used only for the construction of destroyers and submarines of the Defense Agency.

(4) Approved carried-over expenses
    The Diet may allow for carried-over expenses that can be used in the subsequent fiscal year. This system covers cases in which an expenditure item is not spent within the current fiscal year, due to the nature of the expenditure or to unexpected circumstances arising after the formulation of the budget. Prior Diet approval is necessary for these carried-over expenses.

(5) Contract authorization
    Contract authorization system allows the government to make contracts for projects in which it is necessary to incur a liability within a given fiscal year and make all or part of the outlays in subsequent years. Prior approval of the Diet is needed to incur such a liability. The government must also appropriate actual outlays for the year in its annual budget.

6. Fiscal System Council

    Fiscal System Council, composed of scholars, journalists, and business executives, is an organ of the Ministry of Finance that researches and discusses important topics related to the budget, the settlement, and the accounting system of national government.
    The major activities of the Council are the following.
(1) Deliberation of the next fiscal year's budget request from the standpoint of third party, alongside the budget examination by the Ministry of Finance;
(2) Making proposals for the measures to be taken for the next fiscal year's budget formulation, which is submitted to the Minister of Finance in the end of December. The proposals will be based on the Council's deliberation described in (1);
(3) Conducting research and making recommendations in regard to measures toward fiscal structural reform. Specifically, doing an in-depth research on such topics as the concrete means for expenditure cut as well as rationalization, or the setting of concrete consolidation target such as an appropriate level of debt-to-GDP ratio; and,
(4) Conducting research and making recommendations of government accounting system as well as the budget system.

7. Budget Process

   Under the Constitution, only the Cabinet has the right to prepare and submit the budget to the Diet. Unlike the case of ordinary bills, members of the Diet do not have authority to submit budget proposals to the Diet.
  The Ministry of Finance has general jurisdiction over public finance including the budget formulation, and within the Ministry, Budget Bureau is in charge of drafting the budget.

  The following is an outline of the budget formulation process.

Chart VI-2  Process of Formulation of the Budget for FY2001

Process of Formulation of the Budget for FY2001

Note:   Dates in parentheses are for FY2001 Budget Formulation.

(1) Guidelines for budget requests and submission of requests
    The fiscal year in Japan begins on April 1, and the budget formulation process starts in the summer of the previous year. In the initial stage, each Ministry submits its budget request to the MOF by the end of August. About a month before these budget requests, the Cabinet approves the "Guidelines for Budget Requests". The guidelines set out expenditure ceilings for major programs such as public works and social security for the next fiscal year's budget request. These ceilings are usually expressed in terms of absolute or percentage increase (decrease) vis-a-vis the previous fiscal year's amount. Also, the guidelines establish special priority-allocated categories for public works as well as non-public works, in order to facilitate the allocation of funds to such targeted areas as telecommunication, environment-related programs.
    Since each Ministry must prepare its budget request within the limits of these guidelines, each Ministry needs to determine the priorities of the various expenditure items before submitting its request. Therefore, these guidelines are extremely effective in controlling each Ministry's inclination towards making excessive requests and forcing them to be efficient. Thus the system is playing a very important role in curtailing overall government expenditures.
    Please see Chart VI-3 for the guidelines on FY2001 budget requests.

Chart VI-3  Guidelines on FY2001 Budget Requests (Summary)

(tentative translation)
Cabinet Approval
(August 1, 2000)


 Basic policy stance on current fiscal management

  The Japanese Government intends to manage fiscal policies in order to facilitate a shift from public to Private demand, and to put the economy on the path to full recovery by implementing a steady FY2000 budget, including the public works contingency budget.


 Basic framework of guidelines on FY2001 budget requests
(1) The amounts allocated to public works related expenditure and non-public works related expenditure, respectively, equal those in the initial budget for FY2000, which reflects a positive approach to fiscal management. Within the total amounts of these expenditures, prioritized allocation categories will be established. As to non-public works expenditure, a special allocation category will be established in addition to the total amount.
(2) The increase in mandatory expenditures, such as the obvious increase in social security expenditure due to the rise in the elderly population, is to be secured appropriately.
(3) In order to allocate specialized budget for policies, such as the 'Japan rebirth plan', an additional category titled the 'special allocation category for the rebirth of Japan (70 billion yen)' will be established. Simultaneously, the 'prioritized allocation category for public works related to improving the living environment (300 billion yen)' will be established to strengthen public works in the field of social infrastructure related to improving the living environment.

Chart VI-4

Development of the Guidelines for the Budget Requests
Chart VI-4 Development of the Guidelines for the Budget Requests-Continued
Chart VI-4 Development of the Guidelines for the Budget Requests-Continued

(2)Budget examination by the Budget Bureau of the MOF and approval of the Draft Budget by the Cabinet
    Following the submission of budget requests, budget examiners of the Budget Bureau in MOF start a series of hearings with each Ministry and Agency on the details of the budget requests. The budget examiners review each budget item, requesting additional supporting material and data as necessary.
    The budget examination process continues until the end of December, when the Cabinet releases the "General Principles of Budget Compilation". Following this decision, a draft of the Draft Budget is finalized by the MOF and is presented to each Ministry and Agency before the Cabinet authorizes the final Draft Budget.
    For approximately a week, final negotiations regarding the budget requests are held between MOF and each Ministry and Agency on the basis of MOF's draft. After necessary add-ons and adjustments to the MOF's draft, the Draft Budget is approved by the Cabinet and is finalized, usually at the end of December.

(3) Parliamentary budget deliberation
    The Cabinet submits the Draft Budget to the Diet, usually in the latter half of January.
    According to the Japanese Constitution, the House of Representatives is given priority over deliberation on the Draft Budget. After the submission of the Draft Budget to the House, the Minister of Finance outlines the Draft and the government's fiscal and monetary policies in his/her Budget Speech. In the House of Representatives, the Draft Budget is deliberated by the Budget Committee, including the opening of statutory public hearings. After approval by the Committee, the Draft is then put to a vote at a plenary session of the House of Representatives. After approval by the House of Representatives, the Draft Budget is sent to the House of Councilors.
    In the House of Councilors, the Budget Committee holds deliberations in the same manner as in the House of Representatives. Likewise, the Committee sends the Draft Budget to a plenary session of the House of Councilors after approval. Following its passage in the House of Councilors, the Budget becomes effective in April 1st, the beginning of a fiscal year.
    When the decision of the House of Councilors differs from that of the House of Representatives, a Conference Committee comprised of selected members from both Houses is convened. If the Conference Committee cannot come to an agreement, or if the House of Councilors does not make final resolution within 30 days after the receipt of the draft Budget approved by the House of Representatives, the conclusion made by the House of Representatives shall be that of the entire Diet.
    In this way, the Constitution stipulates the House of Representatives' superior position in budget deliberations and, at the same time, intends to facilitate budget deliberations by both Houses so that government activity will not be jeopardized due to the delay of the passage of Draft Budget in the Diet.

8. Execution of the Budget

    Once the budget comes into force, the Cabinet immediately decides to distribute the budget to the heads of all Ministries and Agencies for their individual execution of the budget.
    The heads of the Ministries and Agencies cannot disburse more than the amount of the apportioned budget. Also, in order to ensure accurate and appropriate execution of the budget, the Public Finance Law requires each Ministry and Agency to submit the following documents to, and get an approval from the Minister of Finance.

(1) For public expenditures as well as the expenditure items designated by the Ministry of Finance, a comprehensive and detailed annual contract plans before the actual disbursements of the funds, and,
(2) For all expenditures, a detailed quarterly disbursement plan.


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