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Speech on Fiscal Policy by Minister of Finance Nakagawa at the 171st Session of the National Diet

Speech on Fiscal Policy by Minister of Finance Nakagawa
at the 171st Session of the National Diet

January 28, 2009

Before deliberation on the FY 2009 budget begins, I would like to state my beliefs regarding my basic philosophy on fiscal policy and provide an overview of the budget.

(Responding to the recent economic situation)

First, I will discuss responses to the recent economic situation.

Looking at the status of global financial and capital markets, financial institutions’ failure to adequately manage the risks relating securitized products and financial derivatives which had rapidly spread in the United States and some other countries resulted in massive losses, and caused management issues to surface in major American and European financial institutions. This caused the markets as a whole to fall into turmoil — a "once-in-a-century" financial crisis.

The turmoil in financial and capital markets is having a negative effect on the overall economy through elements such as credit contraction, triggering a global economic downturn. In Japan as well, the economic situation is rapidly worsening, with exports and production down, consumption stagnating, and the employment situation growing grimmer.

In response to this situation, under these difficult circumstances, the Government is pushing a three-stage fiscal policy, comprising "immediate economic stimulus," "medium-term fiscal reconstruction," and "medium- and long-term economic growth through reform."

First, we have compiled a series of economic stimulus measures totaling approximately 75 trillion yen, about 12 trillion yen of fiscal stimulus measures and about 63 trillion yen of financial support. As for the individual steps in this series of measures, we are rapidly implementing them beginning with those most able to be put into effect quickly. However, in order for these countermeasures to be effective, we believe it necessary to implement the budget for FY2009 in tandem with the first and second supplementary budgets for FY2008 in a seamless manner.

Furthermore, beginning with the amendment of the Act on Special Measures for Strengthening Financial Functions, we are carrying out various measures to stabilize financial markets and enhance smooth financing.

Moreover,

Japan has made active contributions such as indicating its intention to lend up to the equivalent of U.S. $100 billion to the IMF at the summit on financial markets and the world economy. This was well-received by other countries. Based on our experience of surmounting the crisis that followed the collapse of the bubble economy by our own ability, Japan will actively participate in the discussions for designing a framework to the new global economic and financial situation in the aftermath of the financial crisis. At the same time, we will work towards Japan's own economic recovery and contribute to the world economy.

(Japan’s current fiscal condition and fiscal consolidation efforts)

Next, I will address the state of Japan's current fiscal condition and fiscal consolidation efforts:.

As I have stated, the Japanese economy has been drawn into the thick of the global financial crisis. Meanwhile, the country’s fiscal condition is also extremely severe, given that the outstanding long-term debts owed by the central and local governments are projected to total 804 trillion yen (158 percent of GDP) at the end of FY 2009, which is the worst level among major developed countries.

As stated in the declaration of the Summit on Financial Markets and the World Economy, it is essential that we maintain a policy framework that will ensure fiscal sustainability even in the situation where an immediate response is called for. Particularly in the case of Japan, given the enormous amount of outstanding debt, fiscal consolidation is a priority in order to work toward stable economic growth. We will continue our fiscal consolidation efforts in accordance with our current nonbinding goal relating to the primary fiscal balance, while at the same time giving top priority to economic recovery for the time being.

In order to fulfill our medium term responsibilities relating to fiscal policy and to extend to the public a stronger sense of safety regarding the social security system, we will promote our efforts toward a fundamental reform of the tax system, including that of the consumption tax, in accordance with the "Medium-term Program" approved by the Cabinet at the end of 2008.

(Outline of the draft budget for FY 2009 and revision of the tax system)

Next, I will give an outline of the draft budget for FY 2009 and revision of the tax system.

The draft budget for FY 2009 is a "bold, action-oriented budget to safeguard people’s daily lives" and, as such, aims to implement measures to protect people’s daily lives and Japan’s economy in the midst of the current global economic and financial crisis.

To protect people’s daily lives, we have taken measures to ensure sufficient doctors and medical treatment and to promote employment, as well as to support child birth and child rearing. We are also introducing policies to provide safety nets to protect Japan’s economy and measures to cultivate future growth. These essential measures were formulated in a highly prioritized manner by utilizing the framework for addressing the priority challenges. From the viewpoint of maintaining fiscal discipline, we are continuing reforms based on the "Basic Policies 2006." Moreover, in line with the points suggested by the Council for Comprehensive Review of Administrative Expenditures, a thorough reduction in unnecessary spending will be carried out by strictly reviewing the necessity of respective policies. These measures include drastic cuts in government expenditure relating to public interest corporations and special accounts, as well as expenditure on public relations.

The budget for general expenditures is 51.731 trillion yen. Because of an increase in the government's share of basic pensions and the shift to general use of funds earmarked for road construction, general expenditures are 4.4465 trillion yen higher than the previous year's initial budget.

As for local government finances, we have added 1 trillion yen in tax allocations to local governments to help local governments work to create jobs and smoothly carry out projects to ensure regional safety and security and for regional regeneration. Furthermore, regarding diminished revenue from national and local taxes, we will carry out appropriate supplementary measures, maintaining local expenditure reform. This results in an increase in tax allocation to local governments of 959.7 billion yen above the previous fiscal year's initial budget, to 16.5733 trillion yen.

With national debt servicing of 20.2437 trillion yen, the total general account budget is 88.548 trillion yen, an increase of 5.4867 trillion yen over the previous fiscal year's initial budget.

As for revenues, primarily because of the struggling economy, revenue from taxes is expected to decline by 7.451 trillion yen from the previous fiscal year's initial budget, to 46.103 trillion yen. Other revenues include 4.235 trillion yen from the Fiscal Investment and Loan Program special account financing loan fund account, for a total of 9.151 trillion yen.

As I have described, we are making the maximum possible effort on both income and expenditures, but with tax revenue sharply decreasing, new government bonds amounting to 33.294 trillion yen must be issued.

Next, I will discuss major spending.

Regarding social security related spending, an exceptional transfer of funds from the special account for Fiscal Investment and Loan Program to the general account will secure temporary funds, and the national treasury will bear one half of the costs of basic pensions. Furthermore, in order to make expenditures more efficient, we will promote the use of generic drugs, while emphasizing important issues such as securing enough physicians, emergency medical care, and supporting childbirth and childrearing. As for employment measures, we will address help with housing and people's general welfare, job preservation, and reemployment support.

Regarding spending to promote education and science, we will upgrade educational environments to meet new national curriculum guidelines with the aim of improving basic academic abilities. Along with integrated support for schools, families, and communities, we will emphasize support for the kind of fundamental research that wins Nobel Prizes. We will increase funding for science and technology promotion while making it more transparent.

As for defense spending, while responding to the need to reorganize US forces in Japan and upgrade defense capabilities, we will work to rationalize spending and make it more effective through cost reduction and other measures.

Regarding spending on public works, along with abolishing the system of earmarking funds for road construction and shifting those monies to the general account, we will eliminate the extraordinary grants to upgrade regional roads that depended on that special funding system and create grants for the creation of infrastructure for regional revitalization. These will be combined with contributions to social security funds. We will also emphasize projects that contribute to ensuring the safety and security of the public's daily lives, to regional independence and regeneration, and to greater growth potential.

As for spending on economic cooperation, we will raise its effectiveness, increasing grants in aid and JICA technical cooperation for the first time in nine years. We will work to increase the overall amount of ODA activity.

Regarding spending on measures for small and medium businesses, based on the present economic and financial situations, we will emphasize strengthening the financial foundations of small and medium businesses through the credit guarantee system and other measures, the promotion of fair subcontracting, support for business succession, and tie-ups between small and medium businesses and agriculture, forestry, and fisheries.

As for spending on energy policy, along with holding down special account expenditures as a part of special account reform, we will emphasize achieving a low-carbon society and securing a stable energy supply.

Regarding the budget related to agriculture, forestry, and fisheries, we will select and concentrate on measures that lead to the building of "Strong agriculture, forestry, and fisheries," greater food supply capacity, promotion of cooperation among agriculture, business, and industry, and revitalization of rural and fishing villages.

As for the budget related to public safety, we will emphasize measures to achieve a society where everyone can live safely and securely, beginning with the hiring of more public safety personnel.

In addition, in order to respond dynamically and flexibly to changes in the economic and financial situations, we will set up a new "economic emergency response reserve fund."

Regarding personnel costs for national civil servants, we will cut employment at administrative organs by 14,805 people.

Even setting aside losses related to the reform of the Social Insurance Agency, under the employee reduction plan that began in FY 2006, up to 2,525 jobs have been cut, and reform of the salary structure is reflected in the budget.

Also, regarding the FY 2009 Fiscal Investment and Loan Program, based on the current economic and financial situations, in order to respond appropriately to necessary capital demands such as for measures on corporate financing, funding will increase 14.4 percent above the previous fiscal year's program, to 15.8632 trillion yen. This is the first increase in 10 years.

In addition, regarding the total cost of national bonds issued, including refinancing bonds and investment and loan bonds, this will increase for the first time in four years, to 132.2854 trillion yen. With government debt climbing, it remains necessary to appropriately manage debt as a part of overall fiscal management. When issuing government bonds, stable absorption and working to hold down medium- and long-term procurement costs are fundamental. We will work to issue bonds in accordance with market needs and trends.

I will now discuss revision of the tax system.

With regard to the FY 2009 revision of the tax system, we intend to make the necessary revisions to home and land taxes, corporate taxes, taxes on small and medium enterprises (SMEs), the inheritance tax, taxation of financial and securities transactions, international taxation, automobile taxation to help achieve economic recovery in light of the current economic and financial situation.

In more concrete terms, along with greatly expanding the tax deduction for home mortgages, we will introduce a wide array of measures, such as allowing immediate depreciation of new-energy and energy-saving facilities, lowering the reduced corporate tax rate for SMEs, resuming the refund system relating to net loss for SMEs, and reducing automobile tonnage tax on environment-friendly cars.

(Conclusion)

This has been an explanation of our basic thinking on fiscal policy and an overview of the FY 2009 budget.

In order for measures to defend the public's daily lives and the Japanese economy to be immediately implemented at the start of the coming fiscal year, it is essential to pass the FY 2009 budget before the end of the current fiscal year. I hereby request that you debate the budget and related bills and promptly give your approval.

Japan rose from the ruins of World War II to achieve "miraculously" high economic growth, and overcame the shock of two oil crises.

Today, the world faces another financial crisis. I am certain, however, that having already passed through so many trials, there is no obstacle that Japan and we Japanese cannot overcome. I will do everything in my power to help Japan realize its potential and to help the Japanese people recover their good spirits and confidence.

I urgently request the public's understanding and cooperation.

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