Speech on Fiscal Policy by Minister of Finance Kan at the 174th Session of the National Diet
January 29, 2010
Before I request deliberation on the budget for FY2010, I would like to state the basic philosophy underlying the government's fiscal policies and provide an outline of the budget.
(Introduction)
Four months have passed since the Hatoyama Cabinet was formed as a result of the overwhelming support from the public in the last general election. The new administration is now submitting its first main budget. I would like to express my gratitude to all those that have cooperated on the formulation of this budget.
The situation facing Japan is unprecedented and very difficult to deal with. However, I am confident that Japan can pave the way for overcoming it with political leadership and the collective wisdom of the people.
With this belief in mind, the government will implement its fiscal policies, based on the philosophies I will describe here and strive to bring security and vitality to the lives of the people.
(Changing resource allocation to drive new economic growth)
The world is undergoing a change in the economic structure triggered by the financial crisis originating in the West. Amid this change, the Japanese economy and society face challenges that call for long-term strategies. These challenges include global warming and a population that is declining and rapidly aging at the same time.
To get over this difficulty, it is essential to find opportunities for new economic growth by changing the traditional resource allocation and consequently transforming the socio-economic structure.
I believe that Japan should seek new economic growth not by relying on public works or excessive market fundamentalism, but by pursuing a third path, a path to the creation of new employment and demand by using our wisdom.
Based on this concept, the government radically changed resource allocations and totally redesigned its budget for FY 2010. Under political leadership, the government will also reallocate resources through the selection and concentration process in line with the “New Growth Strategy (Basic Policies),” which was approved at the end of last year.
(Reviewing the overall fiscal condition and maintaining fiscal discipline)
Sound finance is indispensable to steadily driving economic growth.
Japan's fiscal condition is very severe, with combined long-term national and local government debt expected to reach 862 trillion yen by the end of FY 2010, while tax revenues are sharply declining in the global economic downturn following the failure of Lehman Brothers.
In such a situation, maintaining fiscal discipline and securing confidence in public finances are fundamental to a vibrant economy and society. They will serve as underpinnings for the maintenance and reinforcement of social security and other safety nets and thereby ease people's anxiety about the future.
I will pursue sound public finances while balancing them with economic growth.
As the first step toward this goal, I will change fiscal management. Based on the concept of “selection and concentration,” I will review expenditures and allocate more resources to high-priority fields.
At the same time, I will make the budget implementation process as open as possible so that the Japanese people can [understand][see][determine] the significance of expenditures from their point of view. The auditing process for budget implementation will be enhanced as well.
I will further review projects and administrative work associated with special accounts and independent administrative agencies in terms of necessity, effectiveness, efficiency and so forth. This will include going back to the basic discussion on how to improve public confidence in Japan's public finances.
Under the initiative of the State Minister for National Policy, the government will chart a roadmap to put public finances on a sound footing in the first half of this year by compiling a medium-term fiscal framework spanning multiple fiscal years and by formulating a “Fiscal Management Strategy,” which will include the kind of fiscal discipline to be sought in the medium to long term.
(Ensuring economic recovery)
To ensure economic recovery in the face of the current severe economic climate, the government will implement the second supplementary budget for FY 2009 and the FY 2010 budget, which I will explain next, in a seamless and integrated manner. To combat deflation, the government will join forces with the Bank of Japan to push forward powerful and comprehensive measures.
(Outline of the Budget and the Tax Reform Plan for FY 2010)
The budget for FY 2010 was compiled under these policies. It is a “Budget to Protect People's Daily Lives” that emphasizes measures to bring security and vitality to the lives of the people. The philosophies underlying it are “Putting People's Lives First” and “From Concrete to People.”
To directly help families improve their finances and secure people's lives, the government will carry out key measures listed in the roadmap in the ruling party's manifesto, such as paying Child allowances, providing Individual income support for agriculture, and making public high school tuition effectively free.
Funds needed for implementing these new measures have been secured not by relying on the issuance of additional government bonds, but by the all-around reworking of the budget through the scrutinizing of public projects by the Government Revitalization Unit and by ensuring revenue sources with the repayment of funds in public-service corporations, etc..
The general-account budget is 53.4542 trillion yen, an increase by 1.7233 trillion yen from the previous year's initial budget.
To support the finances of local governments, we will take appropriate budgetary measures to compensate for declines in national and local tax revenues. We will increase Local Allocation Tax Grants by 1.485 trillion yen to ensure that local governments can afford to implement sufficient measures for local revitalizations for the time being, according to the local employment situation etc, while continuing expenditure reform. As a result, Local Allocation Tax Grants etc. will reach a record high of 17.4777 trillion yen, an increase by 0.9044 trillion yen from the previous year's initial budget. This demonstrates the high priority we have given to regional communities.
The general-account budget including a National Debt Service of 20.6491 trillion yen will total 92.2992 trillion yen, an increase of 3.7512 trillion yen from the previous year's initial budget.
On the revenue side, we project that Tax Revenues will decrease to 37.396 trillion yen, a decline of 8.707 trillion yen from the previous year's initial budget, due to the current economic situation. Other Revenues are estimated to be 10.6002 trillion yen, including a special transfer of 4.7541 trillion yen from the Financing Loan Program Fund Account of the Special Account for Fiscal Investment and Loan Program, and a transfer of 2.8507 trillion yen from the Special Account for Foreign Exchange Funds.
As significant declines in tax revenues are expected, we have made maximum efforts in both revenue and expenditure sides in the budget to balance them. As a result, the total amount of new government bond issues will be 44.303 trillion yen.
Next, I will explain the major budget expenditures.
Regarding social security-related expenditures, we will place emphasis on paying child allowances and rebuilding health care and nursing care systems etc. The medical service fees will be substantially increased for the first time in a decade. A review greater than ever before will be conducted to the allocation of medical service fees in order to give higher priority to core hospitals in each region and enhance emergency care, obstetrics, paediatrics and surgery etc. Other items budgeted include measures to combat hepatitis, reductions in care service fees borne by people with disabilities, the continuation of additional welfare benefits to fatherless families, and extension of child support allowances to motherless families. With these measures taken into account, social security-related expenditures will increase about 10% from those in the previous year's initial budget and account for over 50% of the general-account expenditures.
Expenditures related to education and science will place emphasis on fostering education by making public high school tuition effectively free and by other means and promoting science and technology by strengthening support for basic research and research in frontier fields.
Concerning national defense-related expenditures, we will work to secure capacity to defend against potential threats, such as ballistic missile attacks, while making efforts to rationalize and streamline expenditures by reducing costs.
The budget for public works spending was compiled under the slogan of “From Concrete to People.” We conducted a fundamental review of large-scale public works projects to decide if they were really necessary for the people. In addition, we strictly prioritized projects according to their efficiency and necessity and decided to concentrate spending on areas such as the development of infrastructure crucial to strengthening the international competitiveness of Haneda Airport and other facilities and measures to secure people's lives. More over, new subsidies will be established to help local governments to build social infrastructure that meets local needs.
Regarding overseas economic assistance, we reviewed projects for stricter prioritization, while securing an appropriate number of ODA projects as a measure of our international contribution.
With regard to small and medium-size enterprises, measures to vitalize SMEs will be implemented, especially those aimed at enhancing access to financing by SMEs, promoting R&D leading to job creation, and enforcing fair subcontracting practices.
Energy-related expenditures will place emphasis on the measures to create a low-carbon society, while curbing the total expenditures of the special account related to energy.
Regarding the agriculture, forestry and fisheries sectors, higher priority will be given to model projects for the individual (household) income support system. This will help create an environment where motivated farmers can continue paddy field farming and will contribute to the construction of a stable food supply system for Japan and the efficient utilization of paddy fields.
With regard to expenditures for maintaining peace and public order, we will emphasize measures to realize a safe and secure society, such as increasing the number of public security-related personnel.
Concerning personnel expenses for public servants, changes in budget needs of the national and local governments, such as net declines in the prescribed number of employees and salary cuts due to revisions to the pay structure, will be accurately reflected into the budget. Personnel expenses for state workers will be 5.1795 trillion yen, down 0.14 trillion yen from the previous year's initial budget
To make every possible effort to improve the economic situation, we will implement fiscal measures worth 2 trillion yen in total. These will include a 1 trillion yen reserve fund for combating the economic crisis and revitalizing regional economies, and contract authorization by unspecified resolution with a limit of 1 trillion yen.
The FY 2010 Fiscal Investment and Loan Program will be worth 18.3569 trillion yen, an increase of 15.7% from the previous year's initial program. In light of the current economic situation, the Program is aimed at providing financial support for companies and meeting the needs for financing mainly among local governments.
The total amount of government bond issues, including refinancing bonds and investment and loan bonds, will increase for two consecutive years from the previous year's level to reach162.4139 trillion yen. With government debt climbing, we will maintain fiscal discipline to secure market confidence, while appropriately carrying out government bond management policies, such as issuing bonds according to the market needs and trends identified through close dialogue with the market.
I will now discuss revision of the tax system.
Under the new administration, the traditional two Tax Commissions-one operated by the government and another by the ruling party-have been consolidated into one. This new Tax Commission, consisting of politicians, will make the tax reform process more transparent and easy to understand for the public.
The Tax Commission will extensively discuss the composition of the comprehensive tax reform that the government should pursue in order to restructure both expenditures and revenues in an integrated manner. The Tax Commission will also hold debates over cross-ministerial issues, such as the citizen-numbering system, with the National Policy Unit.
The FY 2010 tax reform will be the first step toward a reform of the overall tax system under the principle of being fair, transparent and convincing. It consists of necessary measures addressing various tax items, including revising tax exemption for dependents in order to seek “a conversion from tax exemption to allowances”; raising the cigarette tax with clear emphasis on public health; enhancing the public benefit tax system to support the new notion of “publicness”; changing the temporary tax rates on fuels and automobiles; abolishing the tax system for single-owner companies; and reviewing special taxation measures from the viewpoint of taxpayers. These measures will be implemented in an integrated fashion.
(Contribution to the recovery and development of the global economy)
Lastly, I will talk about efforts toward the recovery and development of the global economy.
At the Meeting of the G20 Finance Ministers and Central Bank Governors in November 2009, the participants agreed to maintain policy support to restore the health of the global economy and financial system. At the same time, to underscore their new approach to economic cooperation, they launched a “framework for strong, sustainable and balanced growth” and initiated a new consultative mutual assessment process to evaluate each country's policies.
Based on lessons learned from the financial crisis, Japan will play an active role in international discussions to develop a framework suitable for the new global economy and finance. Japan will also contribute to the global economy by ensuring its own economic recovery.
In order for the global economy to overcome the crisis and achieve sustainable growth, each country should avoid protectionism and promote free trade. The government will continue to make an all-out effort to advance the Doha Round of WTO negotiations.
Appropriately incorporating the vitality of fast-growing Asian economies is a pillar of our New Growth Strategy. We will maintain our focus on the promotion of regional financial cooperation and economic partnership agreements with Asian countries
(Conclusion)
This concludes my explanations of the government's basic approach to fiscal management and the draft budget for FY2010.
The passage of this budget by the end of this fiscal year is crucial to the implementation of the measures that are intended to bring security and vitality to people's lives from the beginning of FY 2010. I hereby request that the Diet deliberate on the budget and related bills and promptly give its approval.