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Speech on Fiscal Policy by Minister of Finance Azumi at the 180th Session of the National Diet

January 24,2012 

 Before requesting deliberation on the draft budget for FY 2012 and the fourth draft supplementary budget for FY 2011, I would like to state the basic philosophy underlying the government’s fiscal policies and provide an outline of the draft budgets.

 (Japan’s present economic situation and measures for growth)

 About ten months have passed since the Great East Japan Earthquake brought about unprecedented damage to Japan. During the period, the Government formulated three supplementary budgets for recovery and reconstruction from the earthquake disaster in efforts to promote recovery and reconstruction and avoid a downturn in the economy. As a result, the Japanese economy is still picking up slowly, while difficulties continue to prevail. Meanwhile, there are various risks including overseas economic slowdown fears amid the European sovereign debt crisis, trends in exchange rate markets and constraints of electric power supply under the impact of the nuclear power plant accident.  This year, we will have to put the Japanese economy on a steady revitalization path while overcoming various hardships.

 To this end, we must make all-out efforts to continuously address immediate challenges such as the post-disaster reconstruction and the revitalization of Fukushima and we must enhance Japan’s growth infrastructure by promoting economic and social restructuring to meet environmental changes including the aging population and falling birthrates, a decline in productive population and economic globalization. We will promote the creation of new industries through regulatory and institutional reforms, strategic and diversified economic partnerships at a high level that benefit from growth of the world economy including the Asia-Pacific region, and government-private sector cooperation in overseas infrastructure development. We will also try to exit from deflation and invigorate the economy while maintaining close exchange of information and cooperation with the Bank of Japan in charge of monetary policy.

 As indicated by the European sovereign debt crisis, fiscal deterioration, if left untouched, could become a major risk to affect stable economic growth. We must tackle fiscal consolidation as quickly as possible through the “comprehensive reform of social security and tax” to build the foundation for stable economic growth, as described next.

 (Comprehensive reform of social security and tax)

 Japan’s social security system is a national asset that we can be proud of as the foundation for a society where the citizens support each other. In order to maintain the system for future generations and develop it into a system to ensure security for all generations from children to elderly people, we must create a mechanism to share necessary contributions through the comprehensive reform of the social security and tax.

 Turning to Japan’s fiscal conditions to support social security, we see Japan plagued with the worst conditions in the major advanced countries as tax revenues cover less than half of expenditures with the ratio of long-term outstanding debt of central and local governments to gross domestic product expected to reach 195% at the end of FY 2012. Given the European sovereign debt crisis, fiscal consolidation is an unavoidable challenge to maintain the market’s and the international community’s confidence in Japan and protect Japan’s economy and citizens’ livelihood.

 While gaining citizens’ understanding by promoting our self-discipline efforts including political and administrative reforms, we will have to make the first step towards the “simultaneous achievement of stable financial resources for social security and fiscal consolidation, setting aside consumption tax revenues for social security financial resources, and,on condition that the economic situation is improved,  gradually increasing the consumption tax rate to 8% in April 2014 and to 10% in October 2015.

 Within the current fiscal year, the Government will submit to the Diet comprehensive reform of the tax system bills including revisions to the Consumption Tax Act.

 (Overview of the FY 2012 budget and tax reforms)

 Next, I would like to outline the FY 2012 budget and tax reform package.

 The FY 2012 budget will create the Special Account for Reconstruction from the Great East Japan Earthquake, setting aside necessary funds to seamlessly address reconstruction from the disaster. The budget will also implement the “Measure to Prioritize the Revival of Japan,” giving funding priority to the real revitalization of Japan’s economy and society.  In addition, such initiatives as the “Policy Proposing Type Screening” are reflected appropriately in the budget to eliminate waste expenses in the public sector.  We have thus boldly prioritized key measures while abiding by the Medium-term Fiscal Framework.

 Primary budget balance expenses total 68,389.7 billion yen, down 2,472.8 billion yen from the initial FY 2011 budget.

 The primary balance expenses are combined with 21,944.2 billion yen in national debt service into the general account budget total of 90,333.9 billion yen, down 2,077.7 billion yen from the initial FY 2011 level.

 Among revenues, tax revenues are projected at 42,346.0 billion yen, up 1,419.0 billion yen from the initial FY 2011 level. Other revenues are estimated at 3,743.9 billion yen, down 3,442.7 billion yen from the initial FY 2011 level.

 New government bond issues are planned at 44,244 billion yen as a result of our maximum efforts to stave off spending and expand revenues in the face of the debt service increase and the substantial non-tax revenue decline.

 Regarding the post-disaster reconstruction, we plan to partially revise the Special Account Act to create the Special Account for Reconstruction from the Great East Japan Earthquake to secure the transparency of flow of government funds involving the reconstruction and appropriately manage the redemption of reconstruction bonds, based on consultations between the ruling and opposition parties. The special account books 3,250 billion yen in expenses related to the disaster, 125.3 billion yen in reconstruction debt service and 400.0 billion yen in contingency reserves for recovery and reconstruction. Projected revenues for the special account include 530.5 billion yen in special taxes for reconstruction, 550.7 billion yen in transfer from the general account, 11.8 billion yen in other revenues and 2,682.3 billion yen in proceeds from reconstruction bond issues.

 It is important for these reconstruction funding measures to be implemented smoothly and promptly. Fiscal authorities will closely watch relevant government agencies’ budget implementation.

 I would like to comment on major expenditures.

 As for social security expenditures, we plan to secure necessary funds for pension and healthcare expenses required in accordance with the aging of the population with prioritization taken into account along with a shift to a permanent allowance for children. In order to contribute to economic growth, human resources development and the realization of a safe, secure society, we also plan to expand such measures as the integrated promotion of life innovation, the promotion of home healthcare and nursing care, and support for the employment of new university graduates. As for basic pensions, the Government plans to cover 50% of total basic pension payments by booking 36.5% of the total as expenditures and leaving the remainder to be financed by subsidy bonds that will be reimbursed by revenues coming from the comprehensive reform of the tax system. As a result, social security expenditures for FY 2012 will decline by about 2.3 trillion yen from the initial level for FY 2011.

 Regarding education and science promotion expenditures, we plan to use all possible means for addressing students affected by the disaster, to realize fine-tuned, high-quality compulsory education, to promote speedy university reforms and to expand scholarships and tuition waivers for university students. We also plan to substantially reduce existing funding for nuclear energy, shift such funding to nuclear safety and accident-related measures, implement the revitalization of disaster-affected regional economies and anti-earthquake/tsunami measures utilizing universities, give priority to funding for space and marine programs, and expand support for basic research.

 In local finance, we plan to take thorough actions on the earthquake-tsunami disaster and provide an additional 1.05 trillion yen in consideration of local financial resources shortages as in the previous year, while coordinating local expenditures with national government spending. As a result, local allocation tax grants on a general account basis are set to decline by 190.5 billion yen from the initial FY 2011 level to 16,594.0 billion yen, while actual local allocation tax grants to local governments are planned to increase for the fifth consecutive year. We thus have appropriately secured general account resources for stable local fiscal management, giving maximum considerations to local governments.

 Regarding defense expenditures, we will continue to restructure defense power, to develop dynamic defense power with priority given to readiness and mobility, and to rationalize and streamline expenditures through cost-cutting measures in line with the defense program outline and the medium-term defense buildup plan.

 As for public works expenditures, we give funding priority to really necessary infrastructure development while continuing to rationalize and streamline expenditures through “selection and concentration” and cost-saving efforts.

 On overseas economic cooperation, we are prioritizing areas contributing to Japan’s growth and securing projects using official development assistance while reviewing assistance expenditures.

 As for measures for small and medium-sized enterprises, we plan to prioritize fundraising-facilitating measures and support for overseas expansion and for research and development to invigorate SMEs. We also plan to tackle SME support toward minimum wage hikes.

 In respect to energy measures, we give priority to measures to secure nuclear safety and cover electricity supply shortages in consideration of the Tokyo Electric Power Co. Fukushima Daiichi nuclear power plant accident.

 Regarding agriculture, forestry and fisheries, we plan to enhance Japan’s competitiveness and capacity based on the “Basic Policy and Action Plan for Revitalizing Japan’s Food, Agriculture, Forestry and Fisheries,” to integrate farmlands, to promote younger people’s entry into farming in the pursuit of more agriculture undertaken by young people and to take such measures as stepped-up cooperation by primary industry with secondary and tertiary industries in order to reform agriculture into a sector that would attract young people by allowing them to securely demonstrate their ingenuity.

 As for the budget related to public safety, we plan to expand such measures as the development of infrastructure for police operations responding to disasters and the prevention of repeat offenses to realize a society where people can live safely and securely.

 Regarding national government personnel expenses, we plan to strictly control personnel for all government agencies while giving appropriate considerations to increasing personnel for restoration and reconstruction from the Great East Japan Earthquake. National government personnel expenses are planned to decline by 66.1 billion yen from the initial FY 2011 level to 5,094.4 billion yen.

 In the Fiscal Investment and Loan Program, the plan for FY 2012 is designed to proactively promote reconstruction from the Great East Japan Earthquake, Japan’s rebirth, and enhancement of growth capacity based on the “Strategy for Rebirth of Japan,” while steadily  prioritizing and improving the efficiency of FILP projects. The total amount of the plan is 17,648.2 billion yen.

 The JGB total issuance amount for FY 2012, including reconstruction, FILP and refunding bonds, is planned to be 174,231.3 billion yen, showing an increase from its level the previous year, marking consecutive increases for four years. Given the massive government bonds outstanding, we will remain committed to maintaining our fiscal discipline to secure market confidence and will soundly implement our debt management policy reflecting market needs and trends in government bond issuances, based on close dialogues with the market.

 The FY 2012 tax reform package covers particularly urgent measures including tax reforms contributing to the growth strategy, maintenance of tax fairness, improvement of taxation, and treatment of measures left over from the FY 2011 package.

 Specifically, the package calls for reforming vehicle taxes, extending special treatments of tax deductions for research and development tax credit, expanding and extending non-taxable treatments of gift tax for the purchase of residential housing and setting the upper limit on employment income deductions.

(Overview of the fourth supplementary FY 2011 budget)

 Next, I would like to outline the fourth supplementary budget for FY 2011.

 Expenditures include additional mandatory expenses for disaster-related measures. Among other expenditures are elderly healthcare, childrearing and welfare expenses, financing for small and medium-sized enterprises and other expenses, and local allocation tax grants. The supplementary budget also cancels some of debt service and other earlier-authorized expenditures.

 As for revenues, increase in tax and non-tax revenues compared to the initial budget for FY2011 is projected.

 Eventually, the fourth supplementary budget for FY 2011 adds 1,111.8 billion yen in revenues or expenditures to the level after the third extra budget for the year, boosting final FY 2011 revenues or expenditures to 107,510.5 billion yen.

 Relevant supplementary measures are planned for special accounts.

(Concluding remarks)

 This concludes my explanations of the government’s basic approach to fiscal management and the outline of the draft budget for FY2012 and the fourth draft supplementary budget for FY2011.

 The passage of this budget by the end of this fiscal year is crucial to the implementation of measures for the revitalization of Japan’s economy and society from the beginning of FY2012.  I hereby request that the Diet deliberate on the budget and related bills and promptly give its approval.

 In order to allow Japan to overcome various hardships and make a step forward, we must revitalize the Japanese economy while achieving both economic growth and fiscal consolidation. We will continue to make utmost efforts to promote reconstruction from the earthquake disaster and address comprehensive reform of social security and tax and other challenges to realize a country where all people from young to old can find bright prospects.

 I sincerely ask for the understanding and cooperation of all the people of Japan.