Speech on Fiscal Policy by Minister of Finance Omi at the 166th Session of the National Diet

Before I request deliberation on the draft budget for fiscal year 2007 and the supplementary budget for fiscal year 2006, I would like to state the government's basic philosophy concerning the future management of fiscal and other policies, and also provide an outline of the draft budgets.

The Japanese economy has emerged from a long slump and is continuing to recover thanks to private-sector demand. In order to make the recovery a sustainable one, we will continue to strenuously implement regulatory reform and other structural reform measures, and strive to boost the Japanese economy's growth potential through innovation. Thus, we will ensure a sustainable recovery led by private-sector demand under price stability.

From an international point of view, we recognize that as economic globalization progresses, we must take advantage of the growth and vitality of the world economy, particularly in Asian nations, to revitalize our economy. It is also important for Japan to contribute to the economies of Asia and the world and to build relations with other countries so as to foster mutual development. To that end, Japan will promote cooperation with its G7 partners, other Asian countries, international organizations and other entities. Japan will also strengthen the multilateral trade system under the World Trade Organization (WTO) and work hard to promote Economic Partnership Agreements (EPAs), improve its customs system through tariff reform and revise tax treaties, thus becoming more open to the outside world.

In formulating the draft budget for FY2007, we have endeavored to cut expenditures thoroughly and to review spending items, in order to make further progress toward restoring fiscal health. As a result, the general account budget totaled 82,908.8 billion yen.

In terms of revenue, we project tax revenues of 53,467 billion yen and non-tax revenues of 4,009.8 billion yen.

With regard to expenditures, we have maintained the policy of cutting spending thoroughly and have also reduced expenditures for many items in general expenditure for FY2007 from the levels in the initial budget for FY2006. At the same time, we have made budget allocations with clear-cut priorities, attaching importance to compassionate measures for citizens and regions. As a result, we have managed to limit the amount of general expenditures to 46,978.4 billion yen while estimating a tax revenue increase of 7,589 billion yen over the initial budget for FY2006. The amount of general expenditures represents an increase of 612.4 billion yen from the initial budget for FY2006, but if the spending increase of 317.9 billion yen related to the change in the system of the special account for electric power development is excluded, the increase would be just 294.5 billion yen.

Concerning local allocation tax grants, the amount provided according to the rate prescribed by law is projected to rise sharply because of the tax revenue increase, but we have imposed as much belt-tightening as possible through a review of local government expenditures and managed to limit the total amount of tax grants to 14,931.6 billion yen, an increase of 373.2 billion yen from the initial budget for FY2006. Also, we have decided to transfer the central government debt of 18,664.8 billion yen in the special account for local allocation tax grants to the general account and to start redeeming that debt.

Including the additional 1,732.2 billion yen for redeeming this debt, we project that debt servicing costs will total 20,998.8 billion yen, a 2,237.2 billion yen increase from the initial budget for FY2006.

As a result of the measures I have mentioned, we have reduced the amount of new government debt issuance by 4,541 billion yen from the initial budget for FY2006 to 25,432 billion yen, thus achieving our largest-ever cut. In addition, by commencing the debt redemption I have just mentioned, we have effectively made more progress toward restoring fiscal health, in the amount of some 6,300 billion yen, than in the initial budget for FY2006.

Furthermore, the transfer of the debt from the special account for local allocation tax grants to the general account, and the change of the system in the special account for electric power development promotion, will contribute to enhancing budget transparency and making effective use of fiscal funds. This reflects a qualitative improvement of fiscal reform.

Next, I will explain the major expenditure items.

With regard to social security-related expenditures, we are promoting measures to cope with the declining birthrate, to secure a sufficient number of doctors where they are necessary and so on. At the same time, in order to continue efforts to reform the social security system and cut expenditures, we will reduce the national government's contributions to the employment insurance scheme and review welfare benefits for needy families.

Concerning expenditures related to education and science, we have enhanced our priority-driven approach, concentrating our focus on measures to promote the ''rebuilding'' of education while making steady efforts to reduce budget allocations that are similar in nature to institutional subsidies, such as the national government's contributions to compulsory education. In the field of science and technology, which is the driving force of innovation-led economic growth, we have ensured a budget increase while thoroughly implementing a policy of ''selection and concentration.''

In relation to defense-related expenditures, we have strived to promote efficiency while responding appropriately to programs such as ballistic-missile defense and the realignment of U.S. forces in Japan.

With regard to public works spending, while curbing expenditures overall, we have placed priority on investment that will directly help foster self-sufficiency and revitalization of regional areas and increase Japan's growth potential.

Concerning overseas economic assistance, we have curbed expenditures through cost reduction and stringent selection and prioritization of spending items, while seeking to secure an appropriate volume of ODA activities.

With regard to small and medium-size enterprises, the source of the Japanese economy's vitality, we aim to reinvigorate them by placing clearer spending priorities mainly on projects that will help achieve regional revitalization and assist ''Challenge Again'' efforts.

For energy-related expenditures, we have reviewed spending items in the special account and changed the treatment of the Promotion of Power-Resources Development Tax so as to include revenue from that tax in the general account, in line with special account reform. At the same time, we have steadily taken steps to secure stable energy supplies and cope with global warming.

With regard to spending related to agriculture, forestry and fisheries, we concentrated our focus on measures to assist core-farmers, in order to promote structural reform in this industry, and on measures to promote training of farmers and revitalization of rural economies.

With regard to expenditures for maintaining law and order, we have placed priority on measures necessary to create a safe and secure society, such as increasing public security-related personnel.

Concerning personnel expenses for central government public employees, we will achieve a net reduction of 2,129 in staff of administrative organs, a deeper cut than in FY2006. Also, the draft budget properly reflects progress made in Remuneration Structure Reform and review of the method for Comparison of Remuneration between the public and private sectors, such as the size of private enterprises to be compared with the national public sector. In addition, we have paved the way for local governments to curb their expenditures by reducing the number of local public servants on a net basis and by implementing the same salary system structural reform as that being carried out for the central government.

Meanwhile, we are submitting a bill related to special accounts to the current Diet session, with a view to scrapping and consolidating such accounts, as set out in the Administrative Reform Promotion Law.

With regard to revenues earmarked for road construction, we plan to conduct a review in line with ''specific measures for reviewing earmarked revenues for roads,'' which were decided in December 2006. As a result, we will change the system of automatically allocating entire revenue from specific taxes for road construction, which has remained unchanged for some 50 years since it was created. Putting the spirit of reform into practice, we have already expanded the portion of revenues used for general purposes in the draft budget for FY2007 while seeking tax payers' understanding for this reform.

In order to make ''simple and efficient government'' a reality, as part of Reform of Government Assets and Liabilities we have downsized the Fiscal Investment and Loan Program (FILP) by making FILP projects more focused and more efficient. The total volume of FILP projects in FY2007 declined by 5.6% compared to the previous year, to 14,162.2 billion yen. Concerning national properties such as government buildings and housing for central government officials, we will make further efforts to use such properties more effectively by soliciting opinions from the private sector.

The total amount of government bond issues in FY2007 decreased by 21,597.1 billion yen from that in FY2006 to 143,838 billion yen, representing the largest-ever drop. But the amount of outstanding government bonds is still large, and the government must continue properly conducting its debt management policy in coordination with fiscal management. Therefore, we will aim to ensure smooth and stable financing and minimize medium-to-long-term financing costs, and we will continue our efforts to issue bonds meeting market needs and trends.

With regard to tax reform, we will establish a desirable tax system that will contribute to sustainable invigoration of the economy and society, while taking into account the current economic and fiscal environment.

Now that private companies can choose where to operate, it is important to achieve an international equal footing as for tax system. In FY2007, we will review and reform the tax system to render it comparable to the systems of other major countries, from a viewpoint of improving infrastructure that forms a basis for a growth of our economy. One example of reform is the abolition of the ceiling for maximum allowable depreciation costs under the depreciation system. In addition, we will reform taxes related to small and medium-size enterprises, housing and land with due consideration for people's needs in daily life, exempting small and medium-size enterprises from the reserve fund tax in order to help them accumulate capital, and creating a special provision in the housing loan tax reduction scheme to maintain the tax reduction for middle-income and low-income households after the transfer of tax sources to local governments.

Next, I will explain the FY2006 supplementary budget.

On the revenue side, we project an increase of 4,590 billion yen from the initial 2006 budget in tax revenues. On the other hand, we will use the largest possible portion of the tax revenue increase for fiscal consolidation, while appropriating funds for Disaster control measures and other essential and urgent needs with a view to ensuring the public's safety and security. As a result, we have reduced the amount of planned government bond issues by 2,503 billion yen and have decided to use all of the surplus funds, totaling 900.9 billion yen, as defined under Article 6 of the Fiscal Law for redeeming government bonds.

Including expenses for other necessary supplementary measures, the total amount of the supplementary budget for FY2006 increased by 3,772.3 billion yen from the initial budget to 83,458.3 billion yen.

Also, we have taken supplementary steps with regard to the special account budgets and the budgets of government-affiliated agencies.

Now I would like to state the basic philosophy concerning the future management of fiscal and other policies.

In the draft budget for FY2007, the government bond dependency ratio dropped for the third straight year to 30.7%, down from 44.6% in FY2004, and the general-account primary balance improved for the fourth straight year, with the primary budget deficit shrinking to some 4,400 billion yen from some 19,600 billion yen in FY2003. This represents a steady step toward fiscal consolidation.

However, Japan's fiscal conditions do not warrant optimism. The balance of outstanding long-term debts owed by the central and local governments at the end of FY2007 is expected to total 773 trillion yen, equivalent to 148 percent of the GDP, the highest level among the major developed countries. By way of comparison, the ratio for Italy, which has the second highest level among the major developed countries, is 121% and those of other European countries and the United States range from 50 to 70%. On the other hand, Japan's ''national burden ratio,'' the index of burden on the nation defined as the ratio of taxes and social security contributions such as health care to national income, is estimated at 39.7% in FY2007. This level is substantially the lowest among the major developed countries. The ''national burden ratios'' in European countries are around 50 to 60%, although the ratio in the United States is 32% because it does not have a universal public health care system. In this connection, the ''national burden ratio'' in Sweden, which is well known for its high level of social benefits, is 70%. In short, whereas Japan's debt balance is the worst among the major developed countries, its ''national burden ratio,'' the measure of burden on the nation, is the lowest. The Fiscal System Council has described this situation as ''a medium level of welfare for a low burden.''

Under these circumstances, we must make steady efforts toward fiscal consolidation in order to avoid shifting the burden to future generations. Therefore, we aim to reduce the debt-to-GDP ratio in a stable manner by the middle of the 2010s. As the first step, we will work on integrated reform of revenues and expenditures so as to achieve a primary budget surplus by FY2011.

But it would be difficult to gain public support for efforts toward the integrated reform of revenues and expenditures if the government were to simply place an additional burden on the nation while doing nothing about the inefficient use of public money. Therefore, we must continue to implement thorough spending cuts with a view to minimizing the public's burden. At the same time, to cover the incremental budgetary costs associated with the increase in social security benefit payments and raising share of government's contribution to the national pension scheme, and measures to address the falling birth rate, Japan needs to secure stable revenue sources. To that end, we will make every effort with a view to achieving the fundamental and integrated tax reform, while giving due consideration to the idea that burden should be shared widely and equitably among people.

From the viewpoints I have mentioned, while we will implement thorough expenditure cuts in the FY2007 budget, we will make every effort with a view to achieving the fundamental reform of tax system including the consumption tax by around the end of FY2007 through substantive and concrete discussions after early autumn this year, taking into account such factors as the settlement of accounts for FY2006 to be completed around next July, and the actual amount of the social security benefit payments as the result of the medical system reform.

It is a basic principle of democratic nations that citizens pay taxes to support the nation. In the United States, Patrick Henry and others used the slogan ''No taxation without representation'' in the War of Independence. In other words, representation equals taxation. It is important for people to understand that taxes, which support state finances, are not something that is ''taken'' from them but that they should contribute voluntarily, to finance the necessary expenditures decided by their representatives.

Fiscal management is not an issue for the government to decide alone; it is something that all citizens should take a close interest in.

There is a long road ahead before Japan can achieve its goal of fiscal consolidation, and we must continue our unflagging efforts toward that goal. The burden must not be shifted to future generations.

Under the Abe Cabinet's philosophy of ''No fiscal reconstruction without growth,'' we will aim to bring about economic revitalization and fiscal consolidation simultaneously and do our best to create a vigorous society with bright prospects for the future.

This concludes my explanations concerning the outlines of the draft budget for FY2007, the supplementary budget for FY2006, and the government's basic approach to future fiscal management. I hereby ask my fellow parliamentarians to deliberate on the draft budgets along with the related bills and promptly give their approval. I also earnestly request the understanding and cooperation of the nation and of my fellow parliamentarians regarding the government's approach to future fiscal management.