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Speech on Fiscal Policy by Minister of Finance Tanigaki at the 159thSession of the National Diet


Speech on Fiscal Policy byMinister of Finance Tanigaki
  at the 159th Session of the National Diet

January 19, 2004
    Before I request the deliberation of the draft budget forFiscal Year 2004 and the supplementary budget for Fiscal Year 2003, I wouldfirst like to state the fundamental philosophy towards fiscal policy and otherfuture policies and also give an outline of the draft budgets.
    The Japanese economy shows promising signs, as thevitality cultivated through many people's wisdom and efforts amid theprolonged recession has finally been put into action through the reformactivities of the public and private sectors. To transform this economicrecovery movement into sustainable economic growth led by private demand, it isimportant to take a comprehensive approach to vitalize the economy, build asustainable fiscal structure that will not pass on burdens to our children andgrandchildren, and ensure the people of their safety and security. TheGovernment, together with the Bank of Japan, will continue to strive to curbdeflation.
    We intend to tackle the following challenges steadily andappropriately and to make efforts to achieve structural reform.
(Fiscal Structural Reform)
    The first challenge is fiscal structural reform.
1. Japan's fiscal condition is worst among advanced countries in theworld, with government bonds outstanding expected to reach nearly 483 trillionyen at the end of FY2004. In our medium- and long-term fiscal management, we arestriving to achieve a primary surplus in the early 2010s.
2. In compiling the draft budget for FY2004, we have maintained anexpenditure reform policy and set the size of general account expenditures andgeneral expenditures at a level smaller than that of the FY2003 budget insubstance. In line with the ''Basic Policies for Economic and Fiscal Managementand Structural Reform 2003 (Basic Policies 2003),'' we conducted prioritized andefficient allocation of budget to areas that are conducive to building a vibrantsociety and economy and to ensuring people's safety, such as science andtechnology and security measures, and focused attention on truly necessarymeasures in other areas as well. We steadily tackled important challenges, suchas the reform of the financial relationship between the central and localgovernment and pension reform, and innovated budgetary process through expandingbudget execution surveys and introducing ''model project'' method as well as''policy package'' method. With regard to special accounts, we are conductingreviews of expenditures by studying all special accounts from a wide-rangingperspective. Through these efforts for spending reform, we restrained governmentbond issuance as much as possible. As a result, the ratio of bond dependencyremained at the same level as the previous year at 44.6%. I believe the FY2004budget will provide a clue for achieving a primary surplus. However, publicfinance remains in a critical condition. We intend to make ceaseless efforts forfiscal structural reform without loosening the reins.
3. We intend to implement debt management policy appropriately, reflectingmarket needs and trends in order to curb financing cost in the long term and tosecure stable financing, while ensuring confidence in government bonds throughfiscal structural reform.
(Tax Reform)
    The second challenge is tax reform.
1. In FY2004, a tax reduction of 1.5 trillion yen (national and local) willbe applied. This is the result of the FY2003 tax reform that achieved awide-ranging reform for the invigoration of a sustainable economy and society.
2. In the FY2004 tax reform, we intend to continue implementing reform toput the movement toward economic invigoration on a firm basis. Specifically,while paying due attentions to both the state of the economy and housing policy,we intend to extend the application of tax reductions on housing loans afterrevising them, reduce income tax rates for capital gains on land to promote theutilization of assets of individuals, and reduce capital gain tax on open stockinvestment funds to the same level as that on listed stocks. Moreover, we willreview the tax system for small and medium-sized enterprises and the corporatetax system, including expansion of the ''angel taxation'' system, in order tosupport creative corporate activities and restructuring of businesses.Furthermore, we will revise the Japan-U.S. tax treaty fully and amend relateddomestic laws in order to promote cross-border investment. In addition, weintend to review the pension tax system with the view of contributing to pensionreform to promote inter-generational fairness as well as fairness within theolder generations.
3. We intend to promote drastic reform of the tax system, while presenting aclear path toward the reform, based on the outline of tax reform announcedrecently by the ruling parties, in order to realize a fair and vigorous economyand society by tackling various challenges, such as establishment of asustainable social security system and promotion of decentralization.
(Contribution to the Stabilization and Development of the World Economy)
    The third challenge is to contribute to the stabilizationand development of the world economy.
1. We will engage in challenges such as strengthening the internationalfinancial system and development of the economies and societies of developingcountries in cooperation with international organizations, other G7 membercountries, and Asian countries. We will also make more contributions tofinancial stability in Asia through the Asian Bond Markets Initiative, etc.
    As for exchange rates, it is important that they remainstable, reflecting economic fundamentals. We will continue to closely monitorthe developments of exchange rates and take appropriate measures as necessary.
2. We will also actively engage in the WTO New Round of multilateral tradenegotiations and promote economic partnerships with Mexico, South Korea, andASEAN, etc. , including free trade agreements.
    We intend to improve the identification procedure concerninggoods infringing on intellectual property rights and strengthen enforcement atthe national border by Customs in the FY2004 revision of tariff-related laws.
(Outline of the Draft Budget for FY2004)
    Next, I will give an outline of the draft budget forFY2004 that we have submitted to the Diet.
1. With regard to expenditures, the amount of general expenditures totals47,632.0 billion yen and the amount of general account expenditures comes to82,110.9 billion yen.
    As for the number of regular national public servants, we areaiming to reduce the number of regular staff of administrative bodies by 553,while staffing appropriately for the sections that are truly necessary, such aspublic security.
2. With regard to the revenue side of the budget, tax revenues are expectedto amount to 41,747.0 billion yen, incorporating the FY2004 tax reform. Otherrevenues are expected to total 3,773.9 billion yen.
    As a result, government bond issues will amount to 36,590billion yen. We will submit a necessary bill for the special deficit-financingbond issues separately to the Diet for deliberation.
3. As for the Fiscal Investment and Loan Program plan, we have furtherprioritized relevant projects in line with the purpose of the Fiscal Investmentand Loan Program reform, while responding appropriately to genuinely necessarydemand for funding such as development of the safety net for small andmedium-sized enterprises. As a result, the FY2004 Fiscal Investment and LoanProgram plan amounted to 20.489.4 billion yen.
4. My next subject is the major expenditures.
    In relation to social security-related expenditures, thepension system will be reformed to establish a sustainable system harmoniouswith the society and economy by striking a long-term balance between benefitsand burdens and will revise medical service fees and drug prices.
    With regard to public investment-related expenditures, wewill prioritize to achieve a vibrant society and economy by taking into accountthe roles played by central and local governments, while also reducing theoverall amount.
    With regard to expenditures for education and science, wewill promote measures to reform education, such as review of the state subsidyto compulsory education, enhancement of academic ability as well as richness inmind, and to establishment of universities full of individuality undercompetitive environments. We have increased budgetary allocations to prioritizedscience and technology based on grading.
    With regard to national defense-related expenditures, whiledrastically reducing overall defense spending, we will aim at an efficient andmoderate defense buildup and have made prioritized budget allocations tomeasures to cope with new threats, such as terrorism and ballistic missiles.
    With regard to the agriculture, forestry andfisheries-related budget, we are focusing our policy measures on entities havingwillingness and capability. And we are steadily promoting structural reform ofagriculture, including reform of rice policy, while paying due respect toensuring food safety/security and environment conservation.
    With regard to economic cooperation, we will attachimportance to the national interest of Japan under the New ODA Charter and areplacing importance on strategic and efficient assistance, while reducing theoverall size of assistance.
    With regard to expenditures for energy, we are steadilycarrying out measures to ensure stable supply of energy and to counter globalenvironmental problems.
With regard to expenditures for small and medium-sized enterprises, we arepromoting entrepreneurship and innovative business management, as well asstrengthening the basis for securing smooth funding for such enterprises.
5. With regard to the Reform of the Three Major Policies on state subsidies,local allocation tax, and allocation (including transference) of tax revenuesources, we have had the results of the reform reflected in the FY2004 budget.First, we streamlined state subsidies to local governments by 1 trillion yenthrough such means as abolition and reduction based on the ''Basic Policies2003'' and the Prime Minister's instruction. As for local allocation tax, weconducted a thorough review of local expenditures from the standpoint ofpromoting the efficiency of local finances and the independence of localgovernments, and then reduced the overall size of local allocation tax, whilepaying due attention to the management of local finances. Moreover, with regardto projects that are affected by the abolition of state subsidies but need to becarried out mainly by local governments, we have transferred part of thenational income tax revenues to local governments as a temporary measure, andwith regard to de-earmaking of the portion of state subsidy to compulsoryeducation for retirement allowance, we have ensured funding sources in the formof special grants on a temporary basis.
    We call on local governments to further review theirexpenditures across the board and actively promote rationalization andefficiency in their operations.
(Outline of the FY2003 Supplementary Budget [Article One of the GeneralAccount, Article One of the Special Account, and Article One of the Budgets ofGovernment Agencies])
    Next, I will give an outline the FY2003 SupplementaryBudget.
1. As for expenditures, the government will appropriate budget for anyparticularly urgent and pressing items in response to additional fiscal demand,such as additional non-discretionary expenditures, measures for disaster reliefand economic cooperation to support the reconstruction of Iraq, and retrenchexisting expenditures.
2. As for revenues, the government expects non-tax revenues to decrease butwill record settlement surpluses in the previous fiscal year. The governmentintends not to make additional issuance of government bonds. In addition, thetransfer of net settlement surpluses into the Government Bonds ConsolidationFund based on Clause 6 of the Public Finance Law will not be made.
3. As a result, the revised FY2003 general account budget will total81,939.6 billion yen, an increase of 150.5 billion yen in both expenditures andrevenues from the initial budget.
    The government will also make necessary supplements to thespecial account and the budget of government-affiliated agencies.
    This is the outline of the draft budget for FY2004 andthe supplementary budget for FY2003.
    While we are seeing new fetal movements in various parts ofthe Japanese economy, they are still unable to emerge from the thick shell ofour past success, like a baby bird pecking at an eggshell from the inside. Atsuch a time when the private economy is desperately pecking the shell from theinside, it is necessary for the government to tap the shell from the outside andtransform the new fetal movements into a great swell. I believe the FY2004 draftbudget is an important step toward reaching that goal.
    I hereby request that you deliberate on the draft budgetsalong with related bills and promptly give your approval.