Speech on Fiscal Policy byMinister of Finance Shiokawa
at the 154th Session of the National Diet
February 4, 2002
Before I request the deliberation of the draft budget for FY2002, I would like first to state the government’s fundamental philosophy towards fiscal policy and also give an outline of the draft budget.
( Introduction )
Japan has been experiencing a long economic slowdown after the collapse of its bubble economy. This is attributed not only to the non-performing loans issue, but also to the malfunctioning of various systems amid rapid developments brought about by structural changes both at home and abroad. Under these circumstances, we must make a socio-economic framework that both revitalizes Japan and allows it to fully exert its potential.
With these circumstances in mind, we intend to make the utmost effort to tackle the following challenges steadily and appropriately in order to achieve reform.
( Fiscal structural reform, etc. )
The first challenge is to tackle fiscal structural reforms as a step towards General Structural Reforms.
The government must provide the right kind of conditions for Japan’s economic revival so that individuals and businesses are able to exert their potential to the full extent.
We believe that fiscal structural reform should aim both for the efficient and stable provision of indispensable public services by the government, and utilization of vitality in the private sector through constant review of both expenditures and revenues.
With this in mind and with the target of “issuing new government bonds of less than 30 trillion yen” in compiling the FY2002 budget, we have set up a policy to “re-allocate 2 trillion yen to core areas, while making an overall reduction of 5 trillion yen”. We have accordingly pushed for further efficiency in spending, while significantly shifting budget allocation to such core areas as measures against the declining birthrate and aging society, and promotion of science, education and IT. On the other hand, we have realized a reduction of spending by a total of more than 1.1 trillion yen, in the general account and the special accounts, as a result of a drastic review of administrative programs and other measures with regard to financial expenditures for special government-affiliated corporations.
We placed importance on employment measures in the first supplementary budget of FY2001, while aiming at immediate implementation of measures with strong economic effects in the secondary supplementary budget, in response to the economic situation. We intend to make efforts for a smooth execution of these measures, at the same time as pursuing the aims of the FY2002 budget in seamless manners.
Japan is witnessing the worst fiscal situation among G7 the member countries, with the balance of long-term liability of central and local governments estimated to reach 693 trillion yen at the end of FY2002. In promoting fiscal structural reform, we will accordingly make efforts to ensure a recovery in the primary balance through continued study of the relationship between receiver and provider in parallel with improvements in the quality of expenditure, its reduction and other measures, on the basis of the “Structural Reform and the Medium-term Economic and Fiscal Perspectives” which was decided in a previous cabinet meeting.
( Establishment of a desirable tax system )
The second challenge is to undertake a comprehensive tax reform.
In the FY2002 tax reform, the government will introduce a consolidated taxation system and, as measures for SMEs, relax special additional tax on retained earnings of family (closely-held) corporations and reduce the taxable value of non-quoted stocks in calculating inheritance tax.
The government will also reform tax exemption of interest income on certain small deposits owned by the elderly, etc (Rojin Maruyu) and apply the exemption only to small deposits owned by disabled persons, etc. Furthermore, the government will significantly review the Special Taxation Measures and take taxation measures for economic promotion in Okinawa.
We believe that tax reform is ―from the viewpoint of how best to utilize national vitality for economic recovery and others― one of the significant pillars of structural reforms that the government is undertaking.
In recent years, the government has paid the utmost attention to the economy, and taken tax measures including the permanent tax reductions. As a result, the national burden ratio of Japan has become the lowest amongst all of the G7 countries. A quarter of our workers do not pay individual income tax and two thirds of 2.5 million corporations do not pay corporation tax. When we reflect that tax is a fee that enables the broad sharing of the burden of public services among society’s members, a discussion of how better to share the overall tax burden as well as what to do about the present “hollowing out of the tax burden” (shrinking tax base and revenue), is absolutely vital.
As economic activities of individuals and businesses diversify, in order to vitalize our economy, the choice of individuals and enterprises in their economic activities should be left free and be respected. In the 21st Century, realization of a tax system that is neutral, undistorted, simple and easy to understand is needed. At the same time, tax reform must adequately deal with structural changes such as the aging of the population and declining birthrate, internationalization, and computerization.
I would like to urge the Government Tax Commission to engage in a comprehensive discussion of tax problems in cooperation with other institutions such as the Council of Economic and Fiscal Policy to formulate fundamental policy guidance by about June. I hope nationwide discussions will take place at the same time. Then, I would like to outline immediate issues by the end of this year. It is the government’s intention to implement them in tax reforms for FY2003 and thereafter.
(Contribution to stabilization and development of the world economy)
The third challenge is to contribute to stabilization and development of the world economy.
It is important to ensure cooperation among countries aimed at the realization of a free and fair international economic community amid globalization. Japan will move ahead with cooperative policy for the stabilization and development of the world economy at such meetings as those of the G7 finance ministers and central bank governors. Moreover, in line with the further development in regional cooperation, we will make more contributions to financial stability in Asia.
In order to maintain and strengthen the multilateral trading system, we will actively engage in the New Round of trade negotiations that was agreed to launch at the WTO Fourth Ministerial Conference. From the standpoint of complementing this and promoting global trade liberalization, Japan is also pursuing bilateral free trade agreements, and recently signed the Japan-Singapore Economic Partnership Agreement (JSEPA).
We are prepared to take such necessary measures as implementation of JSEPA and setting up the custom duty on salt in considering the impact by its import liberalization through the FY2002 revisions of tariff-related laws.
International efforts have been made against terrorist financing since the September 11th attacks on the United States last year. We will present the current Diet session with a draft Amendment of the Foreign Exchange and Foreign Trade Law as counter-measure against terrorism.
( Outline of the draft budget for FY2002 )
Next, I will give an outline of the draft budget for FY2002 which we have submitted to the Diet.
First of all, with regard to expenditures, the amount of general expenditures totals 47,547.2 billion yen, a 2.3 % decrease from the initial budget for FY2001.
As for the number of regular national public servants, we are trying to reduce the number of regular staff of administrative organs by 9,271. We are also actively promoting the streamlining and rationalization of subsidies.
The general account expenditures total 81,230 billion yen, a 1.7% decrease from the initial budget for FY2001.
With regard to the revenue side of the budget, tax revenues are expected to amount to 46,816 billion yen, incorporating the tax system revision which I explained earlier. Other revenues arising from the increase in the transfer from the Special Account for Foreign Exchange Fund, etc., are expected to total 4,414 billion yen.Government bond issues will be increased by 1,682 billion yen from the initial budget for FY2001 to 30 trillion yen. We will submit separately a necessary draft for the deficit-financing government bond issues to the Diet for deliberation.
As for the Fiscal Investment and Loan Program, aimed at efficient and focused allocation of funds in line with the purpose of the reform of the foregoing program and administrative and fiscal reform, and also at reducing the total amount, we have placed priority on the abovementioned relevant program. Further, we will properly respond to the demand for funding necessary in view of the current socio-economic circumstances. The amount of such totals 26,792 billion yen, which is a 17.7% decrease from the initial plan for FY2001.
My next subject concerns the major expenditures.
In relation to the social security-related expenditures, we will make efforts to establish a stable and efficient social security system with long-lasting sustainability, to reform the medical system, and to conduct other efforts, while promoting measures with regard to the declining birthrate and aging society, and severe employment conditions.
With regard to public works related-project expenditures, the overall amount will be reduced. We will place importance on the seven categories indicated in the “Guidelines for Formulation of the FY2002 Budget”. These includes responding to environmental problems, the creation of a recycling socio-economic society, urban revival, etc.
With regard to expenditures for education and science, we are promoting measures to establish an environment for educational reforms, including the improvement of higher education and academic studies, and the promotion of science and technology, by increasing competitive funding, with the aim of establishing a creative and vital nation.
With regard to the national defense-related expenditures, we will aim at an efficient and moderate defense buildup, while coping with the important challenges listed in the Medium-Term Defense Force Buildup Program for responding to various events, and others.
In connection with the agriculture forestry and fisheries-related budget, we are focusing on various measures targeting ambitious and capable management entities in order to promote agricultural reform, as well as developing policies based on the new basic law in forestry and fishery.
With regard to economic cooperation, we are placing importance on the areas subject to assistance, including supporting Afghanistan and its surrounding countries, while reducing the overall size of assistance.
With regard to expenditures for energy measures, we are steadily carrying out a comprehensive energy policy, including measures to counter the problem of global warming.
With regard to expenditures for medium and small-sized enterprises, we are placing priority on the promotion of creativity and innovative business management, as well as strengthening the basis for securing smooth funding for such medium and small-sized enterprises.
In connection with local finances, we are reviewing local expenditures in line with the review of national spending, and also from the standpoint of increasing transparency in finance. We will reduce borrowings in the special accounts for allocated tax and the transfer tax allocation for local governments, while ensuring the necessary amount of the total tax allocation to local governments, and taking appropriate measures to prevent any problems from arising in local fiscal operations. We request that local governments review their overall expenditures and promote rationalization and efficiency in an active manner.
( Conclusion )
This is the outline of the draft budget for FY2002. This budget draft is the first step in moving towards a sustainable fiscal policy by increased allocation of the budget to areas where future developments are expected, at the same time as maintaining moderation of finance and promoting further efficiency in expenditures.
I hereby request that you deliberate on the draft budget along with related bills and promptly give your approval.