Ministry of Finance.

Transcription

1 Japanese Public Finance Fact Sheet Ministry of Finance

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3 Table of Contents 1.General Account Budget for FY Highlight of the FY 2013 Budget 3 3.Comparison of the Government Budget to a Household Budget 11 4.Trends in General Account Expenditures and Tax Revenues 12 5.Accumulated Government Bonds Outstanding 13 6.Factors for Increase in Government Bonds Outstanding 14 7.Long-term Debt Outstanding of Central and Local Governments 15 8.International Comparison of Fiscal Conditions 17 9.Problems of Fiscal Deficit Indicators used to set the Objectives of Fiscal Consolidation Pathway for Fiscal Consolidation The Comprehensive Reform of Social Security and Tax International Trends toward Fiscal Consolidation Comparison in Targets for Fiscal Consolidation in Major Advanced Countries Declining Birthrate and Aging Population Trends in Social Security Benefits and Social Insurance Contributions Social Security Benefits and the Present Situation of Fiscal Resources Government Revenues and Expenditures in OECD Member Countries Special Accounts Net total for each major expenditure in general and special account Thorough Improvement of Budget Efficiency 52 (Reference)Trend in Fiscal Condition 53 Discussion 1. Social Security 55 Discussion 2. Education and Science & Technology 61 Discussion 3. Central and Local Government 63 Discussion 4. Public Works 67 Discussion 5. National Defense 69 Discussion 6. Official Development Assistance 70 Discussion 7. Agriculture, Forestry and Fisheries 71 Discussion 8. Measures for small and medium-size enterprises 72 Discussion 9. Measures for Environment and Energy 73 Discussion 10. Personnel Cost of National Public Servants 74

4 1.General Account Budget for FY (1) Breakdown of Expenditure The general account budget for FY2013 was approx trillion yen. Moreover, the analysis of expenditures show that national debt services, local allocation tax grants and social security account for approx. 70 % of the total expenditure. Initial Budget(approval by the Diet in April 15, 2013) (Unit:billion yen) General Account Total Expenditures 92,611.5 (100.0%) Food Supply 1,053.9 (1.1) Promotion of SMEs (0.2) Energy (0.9) Former Military Personnel Pensions (0.5) Economic Assistance (0.6) Miscellaneous 5,993.1 (6.5) Contingency Reserves (0.4)

5 2 (2) Breakdown of Revenues The tax revenue included in the annual government revenue for the general account budget for FY2013 is expected to be approx. 43 trillion yen. The tax revenue constitutes only less than 50% of the annual government revenue, and the debts (the revenue generated by government bonds) which will be the burden borne by future generations also constitute less than 50%. Initial Budget(approval by the Diet in April 15, 2013) (Unit:billion yen) Special Deficitfinancing Bonds 37, % General Account Total Revenues 92,611.5 (100.0%) Consumption Tax 10, % Others 9, % Gasoline Tax 2,566.0 (2.8) Liquor Tax 1,347.0 (1.5) Inheritance Tax 1,495.0 (1.6) Tobacco Tax (1.1) Customs Duties (1.0) Petroleum and Coal Tax (0.7) Motor Vehicle Tonnage Tax (0.4) Other Taxes (0.4) Stamp Revenues 1,102.0 (1.2)

6 3 2.Highlight of the FY 2013 Budget (1) Outline of the Budget for FY2013 (General Account) As the general account budget for FY2013 was prioritized over the previous fiscal year in light of the fiscal consolidation targets, tax revenues exceeded government bond issues for the first time in four years in the initial budget. (Revenues) FY2012 Budget (Initial) FY2012 FY2013 Tax Revenues 42, , Other Revenues 3, , Government Bond Issues 44, , ,393.0 Construction Bonds 5, , Special Deficit-Financing Bonds 38, , ,259.0 Pension Related Special Deficit-Financing bonds 2, ,611.0 Total 90, , ,277.6 (Expenditures) National Debt Service 21, , Primary Balance Expenditures 68, , ,980.3 Social Security 26, , ,732.3 Local Allocation Tax Grants, etc 16, , Contingency Reserve for Economic Crisis Response and Regional Revitalization FY2013 Budget Total 90, , ,277.6 (2) Highlights of the Budget for FY2013 "Budget for 15 months" coupled with FY2012 Supplementary Budget Notes (Unit: billion yen) Including billion yen of surplus carried over from FY2011, which is transferred to Special Account for Reconstruction from the Great East Japan Earthquake. Bond Dependency Ratio: 46.3% (FY2012 : 47.6% * Considering the amounts required to fill the gap of national contribution between targeted one-half of basic pension and 36.5% of that in initial budget in FY2012) Adding expenses which are increased in FY 2013 budget, securing financial resources (the amounts which fill the gap of national contribution between targeted one-half of basic pension and 36.5% of that in initial budget; 2,597.0 billion yen / increasing transfer to Special Account for Reconstruction from the Great East Japan Earthquake, the cost of litigation related to the compensation for Hepatitis B patients, etc.; billion yen) to FY2012 budget 68,389.7 billion yen, the total amounts are 71,333.9 billion yen. Including transfer to Special Account for Reconstruction from the Great East Japan Earthquake 1,246.2billion yen (550.7 billion yen in FY2012 ) Securing the local general fiscal resources which include local tax, Local Allocation Tax Grants, etc. with equivalent level to previous fiscal year. Primary balance : trillion yen (FY2012 : trillion yen * Considering the amounts required to fill the gap of national contribution between targeted one-half of basic pension and 36.5% of that in initial budget in FY2012) FY2013 Budget, Formulates Budget for 15 months coupled with FY2012 Supplementary Budget, toward the Revitalization of the Japanese Economy, and based on Emergency Economic Measures for the Revitalization of the Japanese Economy. Formulates prioritized budget from the previous fiscal year, in the light of fiscal consolidation targets. Puts priority to three areas; Reconstruction and disaster prevention measures, Wealth creation through growth, and Security of life and regional activation, as well as FY2012 Supplementary Budget,. Prioritized projects (example) 1 Enhancement of the public works on the projects to protect citizen s life and livelihood, in order to respond to urgent issues such as disaster prevention measures and measures for aging social infrastructure. Enhancement of national defense budget for security of life, in order to address the changes in the security environment and to build effective and efficient defense. 2 Review / Rationalization of Public Assistance System and personnel cost of local public servants etc. 3 Not to allocate 910 billion yen (Contingency Reserve for Economic Crisis Response and Regional Revitalization) to the Contingency Reserve, because measures to boost economy have been sufficiently included in "Budget for 15 months. Important first step to fiscal consolidation targets 1 In FY 2013 Budget, tax revenues exceed government bonds issues, with overcoming the extraordinary situation lasting for these three years where tax revenues were less than government bonds issues. (FY2012 Tax revenues; 42.3trillion yen < Government bonds issues; 44.2trillion yen Tax revenues; 43.1trillion yen > Government bonds issues; 42.9trillion yen) 2 Improving primary balance steadily (In general account, FY2012 Initial Budget trillion yen * FY2013 Budget trillion yen ) * Considering the amounts required to fill the gap of national contribution between targeted one-half of basic pension and 36.5% of that.

7 4 (3) Highlights of the Budget for FY2013 ~individual categories~ Allocation of budget was reviewed boldly. And Reconstruction and disaster prevention measures, Wealth creation through growth and Security of life and regional revitalization are prioritized. Reconstruction Allocates 4,400 billion yen to the Special Account for Reconstruction from the Great East Japan Earthquake in FY2013, in order to accelerate reconstruction of Fukushima, including acceleration of reconstruction by community development, and assistance for early return to hometown. At the same time, reviews the framework of financial resources for the recovery and reconstruction toward FY2015. And allocates around 6 trillion yen from gains by the sale of JP Holdings shares etc., for the part of reconstruction costs exceeding 19 trillion yen, projected after FY2013. These measures will help ensure security of people in the affected area. Social Security (Public Assistance System)Reviews the standard for livelihood assistance benefits, as follows: (i)adjustment to the difference by age and the number of family members, and regional disparities, with following the verification result of the specialists, (ii)optimization to the trend of prices. This will be implemented in a stepwise manner from August 2013 to FY2015, considering dissemination of information, etc. (Pension) Reflects expansion of the adjusted amounts of national contribution to basic pension in FY2011(around 330 billion yen). (Reflects the decreased cost to resolve the pension records problem by the progress so far.) Local Allocation Tax Grants (salary of local public servants) Reflects the reduction of salary by -7.8%, to be implemented from July 2013, considering time for preparation, including revision of a local act (submission of a bill to a local assembly in June),etc. Due treatment for local government (i) Local governments finance: Secures the local general fiscal resources which include local tax, Local Allocation Tax Grants, etc. at an equivalent level to the previous fiscal year (59.8trillion yen, +0.13trillion yen from the previous year). (ii) Local economy : Allocates 0.5 trillion yen to Emergency Disaster Prevention/Reduction Projects and 0.3 trillion yen to Local Revitalization Projects. (iii) Promotion of administrative reform : Reflects the effort of each local government to reduce its personnel cost, when distributing resources of Local Revitalization Projects. Public Works Allocates 5.29 trillion yen to public works, increased by 0.71 trillion yen (around +16%) from the previous year by financial resources derived from abolishment of Strategic Grants for Regional Autonomy etc. In addition to the abolishment of Strategic Grants for Regional Autonomy (around 0.64 trillion yen), shift of some budget of Ministry of Agriculture, Forestry and Fisheries from non-public works to public works (0.04trillion yen) etc. are utilized. In the Budget for 15 months, 7.73 trillion yen are allocated to public works. Combined with the supplementary budget, focuses on the 3 priority areas, including measures against aging infrastructure and disaster prevention to protect citizen s lives and livelihoods, considering early revelation of the maintenance benefits and inducement of private investment. National Defense Allocates 4,753.8 billion yen to national defense expenditures (+40billion yen, +0.8% from the previous year) (In Budget for 15 months, over 4,960 billion yen). Reinforcement of monitoring/security capacity for the southwest area and defense system for the islands area, and promotion of procurement reform.

8 5 (4) Changes in Major Budget Expenditures FY 2012 (Initial) Budget FY 2013 Budget Change (FY2012 to FY2013) (unit:billion yen) % Change (FY2012 to FY2013) Social Security 26, , , % Education & Science 5, , % Science 1, , % Former Military Personal Pensions % Local Allocation Tax Grants, etc. 16, , % National Defense 4, , % Public Works 4, , % Economic Assistance % (Reference) ODA % Measures for SMEs % Energy % Food Supply 1, , % Miscellaneous 6, , % Contingency Reserve for Economic Crisis Response and Regional Revitalization % General Contingency Reserve % Total 68, , , % (5) Special Account for Reconstruction from the Great East Japan Earthquake (FY2013 Budget) (Revenue) (Unit: billion yen) Special Taxes for Reconstruction Special Corporate Tax for Reconstruction Special Income Tax for Reconstruction Transfer from General Account Review of Child allowance Reduction of personnel cost of national public servants etc. Surplus carried over from the previous year Review of elimination of highway tolls Revenue from sales of houses for government officials etc. Other Revenues (Revenue of local government s contribution for public works etc.) 1, , Reconstruction bonds (Expenditure) 1,902.6 Total 4,384.0 Expenses related to the Great East Japan Earthquake Public Works related to Reconstruction Expenses related to Reconstruction from the Nuclear Disaster Local Allocation Tax Grants The Great East Japan Earthquake Reconstruction Grants Transfer to Special Account for Government Bonds Consolidation Fund (Interest Payments of Reconstruction Bonds etc.) 3, Contingency Reserve for acceleration of reconstruction & revitalization of Fukushima Total 4,384.0

9 6 (6) Main Expenses related to the Great East Japan Earthquake of the Budget for FY2013 Continuing from the revised budget for FY2012, the budget for FY2013 fully focuses on the recovery and rehabilitation from the disaster caused by the Great East Japan Earthquake. 1. Disaster Relief 83.7 billion yen 2.Disposal of Disaster Waste billion yen 3.Public Works related to Reconstruction billion yen - Disaster recovery of public civil engineering facilities, etc billion yen - Improvement of the road along the coast of Sanriku, etc billion yen etc. 4.Disaster-related Public Financing Program 96.3 billion yen 5.Local Allocation Tax Grants billion yen 6.The Great East Japan Earthquake Reconstruction Grants billion yen 7.Expenses related to Reconstruction from the Nuclear Damages billion yen - Decontamination, contaminated waste disposal, etc billion yen - Formation of a livelihood base for long-term evacuees, promotion of settling down in Fukushima, etc billion yen etc. 8.Other Expenses related to the Great East Japan Earthquake billion yen - Expenses related to the Self Defense Forces billion yen - Subsidy Program for New Business Establishment in the Areas Recovering from Tsunami and Nuclear Disaster towards Employment Creation billion yen - Improvement of earthquake resistance and disaster-prevention performance of school facilities 90.7 billion yen - Subsidy for aid money to reconstruct the lives of disaster victims 84.0 billion yen - Public works for tsunami damage 36.7 billion yen - Disaster recovery project for common facilities such as small-and-medium-sized enterprise unions 25.0 billion yen etc.. Total 3,717.8 billion yen (Note 1)The expenses concerning public works for tsunami damage shall be transferred from general account, and distributed to respective ministries and agencies. (Note 2)Figures may not add up to the totals due to rounding. (7) Review of the framework of financial resources for the recovery and reconstruction The framework of financial resources for the recovery and reconstruction toward FY2015 was reviewed. For the costs exceeding 19 trillion yen, projected after FY2013, around 6 trillion yen from gains by the sale of JP Holdings shares etc. will be allocated. These measures will help ensure security of people in the affected area. Project costs Financial Resources Expenditure on FY2014 & FY2015 Projects which will be certainly implemented in FY 2014 or FY around 2.7 trillion yen FY 2013 Budget 1.5 trillion yen 4.5 trillion yen Surplus money of each. fiscal year etc Surplus money etc around 2 trillion yen Sale of JP Holdings' shares around 4 trillion yen around 3.3 trillion yen around 23.5 trillion yen FY2011 & FY2012 Budget 19 trillion yen Resources in previous outline around 19 trillion yen around 25 trillion yen around 17.5 trillion yen

10 7 (8) Prioritization of budget 1 Measures for reconstruction/disaster prevention 1. Acceleration of reconstruction from the Great East Japan Earthquake (special account for reconstruction) Acceleration of reconstruction/regeneration of Fukushima - Subsidy for prefectures and municipalities to establish a livelihood base, such as securing houses for long-term evacuees and constructing roads around the houses (50.3 billion yen: new) - Subsidy for prefectures and municipalities to improve the environment for child care, and to support settlement, such as building indoor sports facilities and installing playground equipment (10 billion yen: new) Increase of subsidy for reconstruction from the Great East Japan Earthquake so as to accelerate the building of cities, towns, and villages. (591.8 billion yen: Initial budget for billion yen) Support for enterprizes to be newly established in areas damaged by tsunami/nuclear disasters (110 billion yen: new) 2. Disaster prevention and reduction, etc. Improvement of maintenance of road and river management facilities, etc. to promote longer use and infrastructural safety (387.3 billion yen: Initial budget for billion yen) [2012 supplementary: billion yen] (The amount is for directly-controlled projects. Local governments shall repair management facilities, etc. for roads and rivers, and formulate plans for longer use of the facilities by utilizing the subsidy for disaster prevention and safety. ) Subsidy for disaster prevention and safety to intensively support efforts by local governments to secure safety in life space, measures against aging infrastructure, measures for disaster prevention and reduction (1.046 trillion yen: new) [2012 supplementary: billion yen] Measures for earthquake-resistant water facilities and measures against aging water facilities, etc. (34.7 billion yen: Initial budget for billion yen) [2012 supplementary: 30 billion yen] Promotion of earthquake-resistant buildings for public schools, etc. (94% ratio of earthquake-resistant buildings for public schools) (135.2 billion yen: Initial budget for 2012 minus 10 billion yen) [2012 supplementary: billion yen] 2 Creation of wealth through growth 1. Enhancement of growth by promoting private investment Support for research and development of energy saving/renewable energy (156 billion yen: Initial budget for billion yen) [2012 supplementary: 3.5 billion yen] - Technical development of innovative materials for solar power generation - Large-scale verification projects regarding separation/collection and underground storage of CO 2 emitted from thermal power plants, etc. Support for introduction of energy-saving/renewable energy facilities in residences/factories, etc. (143.9 billion yen: Initial budget for billion yen) [2012 supplementary: billion yen] - Gas cogeneration (privately-owned gas-powered generation installation for business operators) - Residences constructed with energy-saving building materials and equipped with renewable energy installations - Electric vehicles Establishment of an environment to promote research and development (Three system reforms) (340.6 billion yen: Initial budget for billion yen) [2012 supplementary: billion yen] - Stabilization of employment of human resources such as skilled research staff and engineers at research institutes - Securing long-term research funds by utilizing the operation grants for independent administrative agencies - Large-scale industry-university joint research and development Promotion of innovation in medical field that includes ips studies (85.6 billion yen: Initial budget for billion yen) [2012 supplementary: 11.8 billion yen] Promotion of establishment of core transportation infrastructure, etc. (e.g. improving logistic networks as metropolitan ring roads, enhancing the functions of international-container-strategic ports and harbors) (477 billion yen: Initial budget for billion yen) [2012 supplementary: 87.1 billion yen] Development of mining resources including methane hydrate, etc.; research and development of technology to survey marine resources; efforts to ensure oil/natural gas interests overseas (137.2 billion yen: Initial budget for billion yen) [2012 supplementary: 72.5 billion yen] 2. Support for small- and medium-sized enterprises/small-scale business operators Support for new challenges including research and development, and promotion of new technologies, etc. that contribute to sophistication of manufacturing technologies by small-and-medium-sized enterprises /small-scale business operators (29.6 billion yen: Initial budget for billion yen) [2012 supplementary: billion yen] Facilitation of business support/fund procurement including business revitalization by small- and medium-sized enterprises/small-scale business operators (110.2 billion yen: Initial budget for billion yen) [2012 supplementary: billion yen] 3. Support for Japanese enterprises to expand their business overseas, etc. Expansion of sales network of Japanese products including image contents such as animation; increase the number of inbound tourists, etc. (Cool Japan); promotion of export of infrastructure, etc., with utilizing Japan s excellent technologies and services. (111.5 billion yen: Initial budget for billion yen) [2012 supplementary: 45.1 billion yen]

11 8 3 Ensuring a sense of security in daily life and revitalizing the regions 1. Ensuring a sense of security in daily life (1) Promotion of a system for reassuring the framework for medical service, child care, and education Improvement of support for child care by increasing the capacity of childcare centers to reduce the number of children on the waiting list (31.7 billion yen: Initial budget for billion yen) [2012 supplementary: 56.1 billion yen] Promotion of support for independence and employment of needy persons, and educational support for children in families receiving public assistance, etc. (11.5 billion yen: Initial budget for billion yen) [2012 supplementary: 6 billion yen] Dispatch of school counselors, etc. to public elementary and junior high schools as a measure against bullying. (4.8 billion yen: Initial budget for million yen) [2012 supplementary: 300 million yen] (2) Safety assurance/quality improvement of living space Comprehensive efforts to ensure safety in regional living space through measures for traffic safety in school zones; elimination of electric poles along roads; barrier-free facilities in public spaces such as pedestrian paths and parks (subsidy for disaster prevention and safety trillion yen: included new) [2012 supplementary: included billion yen] (3) Safety assurance Enhancement of the maritime security system such as by building large-scale patrol vessels to protect Japan s territories and territorial waters (36.4 billion yen: Initial budget for billion yen) [2012 supplementary: 19.8 billion yen] 2. Revitalizing the regions by featuring local characteristics Improvement of infrastructure to strengthen the structure of agriculture, forestry and fishery, such as the larger segmentation of farmland, etc. (579.3 billion yen: Initial budget for billion yen) [2012 supplementary: billion yen] Promotion of building compact, sustainable communities in local cities and suburban areas by gathering medical/welfare facilities and educational/cultural facilities, etc. in the city center for refurbishment (37.5 billion yen: Initial budget for billion yen) [2012 supplementary: 15 billion yen] (9) Examples of rationalization and review of expenditures Salaries for local civil servants Local governments are required to take necessary measures in FY 2013 regarding personnel cost of local public servants, taking into account salary cut of national civil servants. Following this, the Local Finance Plan reduces expenditures for personnel cost (by 0.85 trillion yen) and focuses on dealing with urgent issues such as disaster prevention / reduction, regional revitalization, assuming that personnel cost cut is implemented from July this year in accordance with the central government. Calculating the level of personnel cost by using Laspeyres Index with setting it for national public servants to 100, this index for local public servants (with general administrative function) is approximately for FY Abolishment and reform of Individual Household Income Support for Agriculture The system changed its name to Management and Income Support Measures. Detailed examinations for the necessary amounts to be paid will be carried out. (Expected saving; billion yen) Number of teachers in public schools Necessary measures will be taken regarding the allocation of teachers in public elementary schools by increasing the capacity by 1,400, while rationalizing the existing additional ratio by equivalent to -600, considering the reduction in the number of students. Grant-In-Aid for Scientific Research A system of adjustment fund will be introduced in order to enable flexible use of Grant-in-Aid over fiscal years. This will help prevent using up or abusing fund for research. Public assistance Rationalizes the public assistance system while providing job assistance for the poor and needy people. 1Rationalization of the standard for livelihood assistance - The livelihood assistance standard will be rationalized based on the verification result of the specialists and the trend of prices. (Gradually implemented from August 2013 to FY2015 in stage, for dissemination of information etc. -Expected amounts of saving: -67 billion yen) - Year-end Temporary Aid will be reviewed. (Expected amounts of saving: -7 billion yen) 2Rationalization of medical assistance - Use of generic drugs will be required in principle. - Control over the designated medical care institutions will be enhanced. Abolishment and reform of Strategic Grants for Local Autonomy Strategic Grants for Local Autonomy (675.4 billion yen in FY 2012 Initial Budget) is abolished and transformed to grants of individual ministries to deal with important issues (combined with supplementary budget, this amounts to billion of budget). At the same time, improvements are made such as simplification of administrative procedures. Interest-free scholarship system The current system of paying back fixed amount for the scholarship will be reformed to a system of paying back fixed proportion of income gained after graduation (incomeindexed payment system) from FY 2017 (total amount of paying back will not change). Excess-payment incidents regarding procurement of equipment Based on the amount of excess payment revealed by the special investigation, 3.9 billion yen was reduced from the budget request. In order to prevent similar kind of incidents to happen, procurement reform is strongly promoted.

12 (10) Public sector reform ~personnel costs and number of civil servants~ Personnel cost is curbed and the number of civil servants is reduced, considering Japan s serious fiscal situation and necessity of addressing the Great East Japan Earthquake disasters, measures for regional disaster prevention and economic revitalization, etc., Curbing personnel costs of public servants (-1.7 trillion yen (Central and Local governments)) Reduction by the Temporary Special Act of Salary Revision, etc trillion yen (Central -0.3 trillion yen/local trillion yen) - Implements the reduction of national public servants salary. (average : -7.8%) - Requests local governments and independent administrative agencies, etc. to implement the necessary measures in accordance with the central government. In the Local Government Financial Plan, this salary cut should be reflected from July 2013 with securing sufficient time for preparation to revise relevant local acts. Reduction by decreasing retirement benefits -0.2 trillion yen Saving Effect in FY Gradually decreases retirement benefits of national public servant from January 2013 to July 2014 (-14.9% from last year) - Requests local governments and independent administrative agencies, etc. to implement the necessary measures with relevant to central government Reduction by other measures -0.1 trillion yen - Implements National Personnel Authority's salary recommendation of FY Reduces the number of civil servants Reducing the number of public servant Implements strict review of operations to achieve far larger decrease of civil servants than ever before. (11) Review of the public assistance Adjustment of the level of the livelihood assistance Adjustment of the level of the livelihood assistance benefits (-67 billion yen) - Based on professional verification results, it shall be adjusted to the impact of age, the number of family members, and regional disparity. - The trend in prices since the previous review (2008) shall be taken into consideration. - Benefits shall be optimized in a stepwise manner in about three years from August 2013 to the end of FY2015 Review of the Year-end Temporary Aid (-7 billion yen) - Currently, the benefits multiplied by the number of family members are paid in a uniform manner. The amount of benefits shall be reviewed in consideration of economic efficiency (scale merit). (Note) Year-end Temporary Aid: Aid provided at the year-end when expenses for food, etc., tend to increase. Adjustment of the medical assistance Obligation the use of generic medicines as a principal rule (-2,374(Last year:-1,300)) For medical institution For pharmacy For pensioner of the public assistance - The Public Assistance Act shall be revised to stipulate the duty of making efforts to promote generic drugs for public assistance recipients whom physicians approve the use of generic drugs. - A clerical notice shall be issued to dispense generic drugs, in principle, for public assistance recipients whom physicians approve the use of generic drugs. - A clerical notice shall be issued for use of generic drugs, in principle. - For public assistance recipients who want to use original drugs, their names and reasons shall be reported to the welfare office. They shall be subject to instruction on the use of drugs by welfare offices, in principle. Enhancement the guidance authority of designated medical care providers - Clarification of the requirement to cancel the designation of medical institutions for public assistance. - Establishment of a time limit for recipients to designate their medical care providers. Currently it can be done for an indefinite period. 9

13 10 (12) Outline of the measures for the finance of local governments (FY2013) Securing the total amount of general revenues (e.g. local grant tax, local tax, bond for extraordinary finance) Securing 59.8 trillion yen (compared to the previous fiscal year +0.1 trillion yen), the same level as FY2012, so that local governments can run stable fiscal management Temporary reduction of local public servants salary Reduction of salary based on the assumption that it shall be reduced to the same level as that of *national public servants from July 2013 * Consideration for securing time to prepare for revision of local acts (submission of bills to local assemblies in June), etc. Reduction of salary by 0.85 trillion yen on the basis of local expenditures Measures for urgent tasks including projects for disaster prevention and reduction, and local revitalization Allocation of project expenses based on the salary reduction in order to take urgent measures including projects for disaster prevention and reduction, and local revitalization - Expenses for national disaster prevention project (to be paid by local governments) 0.10 trillion yen * Allocation to measures addressing the Great East Japan Earthquake (national disaster prevention project) - Expenses for the urgent project for disaster prevention and reduction 0.46 trillion yen - Expenses for the project to revitalize local communities 0.30 trillion yen Calculation reflects the efforts by local governments to reduce personnel cost General Account - Provision grants followed to legal rate, etc. - Additionally reserved provision of grants, Legal reserved provision of grants, etc. - Special reserved provision of grants The flow or local allocation tax grants (FY2013) revenue 16.3 trillion yen (-0.2 trillion yen from the previous year) 16.4 trillion yen (including exceptional local allocation grants) (-0.2 trillion yen from the previous year) Special Account for Local Allocation and Local Transfer Tax + Surplus carried forward etc. *extra financial resources - Interest payments for borrowing of the special account expenditure Local Government (prefectural government) (municipal government) 17.1 trillion yen (-0.4 trillion yen from the previous year) * In addition, based on the budget for 15 months, 1.4 trillion yen of an extraordinary subsidy to revitalize local communities in supplementary budgets

14 3. Comparison of the Government Budget to a Household Budget If Japan s public finance is likened to running a household economy with a monthly income of 300,000 yen, it would have to borrow 290,000 yen every month to cover the necessary monthly expenditure and would already have amasses loans amounting to 57 million yen. <Household Budget for a month> <FY2013 General Account> Household monthly income 300 thousand ( annual income 3.6 million) Tax and Non-tax Revenues 47.1 trillion ーー Total necessary expenditure 590 thousand Household expenditures 450 thousand of which Monthly Allowance for children 100 thousand Payment of Loans 140 thousand General Account Expenditures 92.6 trillion Primary Balance Expenses 70.4 trillion of which Local Allocation Tax Grants 16.4 trillion National Debt Service 22.2 trillion = Shortfall=Borrowing 290 thousand = Government Bond Issues=Borrowing 45.5 trillion The Government Bond Issues include Special Deficit Financing Bond Revenues for Pensions (2.6 trillion yen). By the end of the fiscal year, these borrowing would continue to accumulate to reach as follows... Loan Outstanding 57,230 thousand Bonds Outstanding 750 trillion 11

15 4. Trends in General Account Expenditures and Tax Revenues 12 Japan continues to run budget deficits where expenditure exceeds tax revenue. In particular, the difference between expenditures and revenues has been expanded since FY2008 due to lowered tax revenues associated with the economic downturn. In FY2009 and thereafter, the amount of government bonds issued frequently exceeded tax revenues. In FY2013, tax revenues exceeded the amount of government bonds for the first time in four years in the initial budget basis. 20 (trillion yen) Total Expenditures Tax Revenues Special Deficit-Financing Bond Issues Construction Bond Issues (FY) (trillion yen) General Account Expenditures and Revenues FY Expenditure Primary Balance Expenses of which, Local Allocate Tax Grants, etc National Debt Service Revenues(Tax Revenues and Other Revenues) Tax Revenues Other Revenues Government Bond Issues Bond Dependency Ratio (%) (Note 1) FY : Settlement, FY2013: Budget (Note 2) Following various bonds are excluded: Ad-hoc Special Deficit-Financing Bonds issued in FY1990 as a source of funds to support peace and reconstruction activities in the Persian Gulf Region, Tax Reduction-related Special Deficit-Financing Bonds issued in FY to make up for decrease of tax revenues due to a series of income tax cuts preceding consumption tax hike from 3% to 5%, Reconstruction Bonds issued in FY2011 as a source of funds to implement measures for the reconstruction from the Great East Japan Earthquake, Pension-related Special Deficit-Financing Bonds issued in FY as a source of funds to achieve the targeted national contribution to one-half of basic pension. (Note 3) General Account Primary Balance is defined as subtraction of Primary Balance Expenditures from the sum of Tax Revenues and Other Revenues; it is different from the Central Government Primary Balance on SNA basis.

16 5. Accumulated Government Bonds Outstanding 13 Japan s government bonds outstanding have been increasing year after year. The government bonds outstanding are estimated to rise to 750 trillion at the end of FY2013, which amount 17 times as large as Japan s annual tax revenues and will surely impose heavy burdens on future generations. (trillion yen) Equivalent to approx. 17 years of General Account Tax Revenues (Tax Revenues in FY2013 General Account Budget: Approx. 43 trillion) FY2013 Government Bonds Outstanding Approx. 750 trillion (projection) Approx million per person Approx million per family of 4 Average disposable income of a working family Approx million (Note) Disposable income and family size are based on the "FY2010 Survey of Household Economy" by the Ministry of Internal Affairs and Communications. Reconstruction Bonds Construction Bonds Special Deficit- Financing Bonds (As of the end of the FY) FY Government Bonds Outstanding to GDP (Note 1) FY : Actual, FY2013: Budget (Note 2) Special Deficit-financing Bonds outstanding include refunding bonds for long-term debts transferred from JNR Settlement Corporation, the National Forest Service, Ad-hoc Special Deficit-financing Bonds, Tax-reductionrelated Special Deficit-financing Bonds and Pension-related Special Deficit-financing Bonds. (Note3) Government Bonds Outstanding includes Reconstruction Bonds (FY2011 in General Account. FY2012 and thereinafter in Special Account for Reconstruction from the Great East Japan Earthquake) issued as a source of funds to implement the measures for the reconstruction from the Great East Japan Earthquake in FY2011, FY2012 and FY2013 (FY2011: 10.7 trillion yen, FY2012: 10.3 trillion yen, FY2013: 12.2 trillion yen). (Note 4) The estimate of FY2013 excluding front-loading issuance of refunding bonds is approximately 730 trillion yen.

17 14 6. Factors for Increase in Government Bonds Outstanding Taking a look at the accumulation of government bonds outstanding from FY1990, when Japan was able to manage its public finance without issuance of special deficit-financing bonds, in the 1990s, expenditure growth was mainly attributable to the increase in public works-related expenditures. In contrast, expenditures have been recently growing mainly due to increased social security-related expenditures resulting from the aging of Japanese society and Local Allocation Tax Grants, etc.. Government revenues have been shrinking mainly because tax revenues are falling due to the economic downturn and tax cuts. Increase in Government Bonds Outstanding from FY1990 to FY2013: around 571 trillion yen Contribution of Expenditure: around 308 trillion yen (trillion yen) 35.0 Consistently increased due to the aging population Local Allocation Tax Grants, etc. (+ around 74 trillion) Social Security (+ around 191 trillion) Public Works (+ around 57 trillion) Other expenditures Effect of receipt decline: about 145 trillion yen (FY) (trillion yen) Decrease in tax revenues reflecting economic slowdown and a series of tax cuts. Tax Revenue (+ around 194 trillion) Approx. 59 trillion yen: reduction due to tax reform Approx. 103 trillion yen: including the accumulated difference in income tax revenue from interest/dividends/land and stock transfers between FY1990 and each fiscal year (FY) The portion marked with alone accounts for about 80% of the increased public bond balance. Non-tax Revenue Impact from balance gap in FY1990: around 65 trillion yen Other factors (long-term debt transferred from Japan National Railway, etc.): around 53 trillion yen (Note 1) FY1990-FY2012: Settlement, FY2013: Budget. (Note 2) Reconstruction Bonds to secure financial resources of measures implemented from FY2011 to FY2015 for reconstruction from the Great East Japan Earthquake is excluded from Government Bonds Outstanding above. (Reconstruction bonds outstanding is expected at 12.2 trillion yen at the end of FY2013.) Accordingly, expenses financed by the issuance of Reconstruction Bonds in FY2011 (7.6 trillion yen) are excluded. (Note 3) As for the Local Allocation Tax Grants, those based on the legal rates of major 5 national tax revenues are excluded from both sides of expenditure and revenue as they offset from a central government s point of view, and the others are counted as an expenditure increase.

18 General government liabilities 7. Long-term Debt Outstanding of Central and Local Governments In addition to an idea of government bonds outstanding (5.), there is another idea of long-term debt of which interest payment and redemption funds are covered mainly by tax revenues. The total of long-term debt outstanding of central and local governments is expected to reach 977 trillion yen (201% of GDP) at the end of FY2013. (trillion yen) As of end As of end As of end As of end As of end As of end As of end As of end FY1998 FY2003 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 <Actual> <Actual> <Actual> <Actual> <Actual> <Actual> <Estimate> <Budget> Central government Approx.390 Approx.493 Approx.573 Approx.621 Approx.662 Approx.694 Approx.739 Approx.777 (Approx.568) (Approx. 613) (Approx.645) (Approx.685 ) (Approx.727) (Approx.757) Government bonds outstanding (General bonds outstanding) As a percentage of GDP Approx trillion yen (922 trillion yen) Local bonds: 146 Borrowings in the Special Account for Local Allocation Tax: 33 Borrowings in General Account: 13 Government bonds outstanding [General bonds]: 750 (730) (1) Public debt outstanding of central and local governments Approx % 91.1% Approx.546 Approx.594 Approx.636 Approx.670 Approx.709 Approx.750 (Approx.541) (Approx. 586) (Approx.619) (Approx. 660) (Approx.697) (Approx.730) 112% 125% 133% 143% 148% 154% ( 110% ) ( 124% ) ( 129% ) ( 141% ) ( 145% ) ( 150% ) Local government Approx.163 Approx.198 Approx.197 Approx.198 Approx.200 Approx.200 Approx.200 Approx.201 As a 32% 40% 40% 42% 42% 43% 42% 41% percentage of GDP Central and Local government As a percentage of GDP Approx.553 Approx % 138% Approx.770 Approx.819 Approx.862 Approx.895 Approx.940 Approx.977 (Approx.765) (Approx.811) (Approx. 845) (Approx. 885) (Approx.928) (Approx.957) 157% 173% 180% 190% 196% 201% ( 156% ) ( 171% ) ( 176% ) ( 188% ) ( 193% ) ( 196% ) (Note 1) GDP for FY1989-FY2012: Actual, FY2013: Projection. (Note 2) Government Bonds Outstanding includes reconstruction bonds issued (FY2011: in General Account, after FY2012: in Special Account for Reconstruction from the Great East Japan Earthquake) as a source of funds to implement the measures for the reconstruction from the Great East Japan Earthquake (FY2011: 10.7 trillion yen, FY2012: 10.3 trillion yen, FY2013: 12.2 trillion yen). (Note 3) Figures in parentheses in FY2008 FY2013 do not include front-loading issuance of refunding bonds. (Note 4) The borrowings in the Special Account for Local Allocation and Local Transfer Tax are shared by the central and local governments in accordance with their shares of redemption. The amount of the borrowings outstanding incurred by the central government was transferred to the general account at the beginning of FY2007, so that the borrowings outstanding in the Special Account since the end of FY2007 is the debt of the local governments (approx. 33 trillion). (Note 5) For the end of FY 2011, local regions are expected to be based on the local government bonds plan, etc. (Note 6) Further, government debts are approx. 105 trillion yen according to the Special Account for Fiscal Investment and Loan Program as of the end of FY2013. (Reference) Some ideas of Debt outstanding in various statistics The total of debt of central and local governments that are explicitly and logically linked to general policy expenditures are calculated. The total of long-term debt whose interest payment and redemption funds are mainly covered by tax revenues is calculated. 977 trillion yen (957 trillion yen) Local governments: 201 including 33 trillion yen in the borrowings in the Special Account for Local Allocation Tax Borrowings: 27 Government bonds outstanding [General bonds]: 750 (730) (2) Long-term debt outstanding of central and local governments Government bonds and borrowings outstanding shows the overview of financing activities such as raising funds from capital markets. 1,107 trillion yen (1,087 trillion yen) FB (Financing Bill): 192 FILP (Fiscal Investment and Loan Program) bonds: 105 including 33 trillion yen in the borrowings in the Special Account for Local Allocation Tax Borrowings: 60 Government bonds outstanding [General bonds]: 750 (730) (3) Government bonds and borrowings outstanding The financial liabilities of general government (the central government, local governments and social security funds) are systematically totaled up based on SNA in order to keep track of the actual economic situation and contribute to international comparisons. 1,097 trillion yen Social security funds: 14 Local governments: 190 Independent administrative agencies, etc.: 16 T-Bills: 159 including 42 trillion yen in discount T-Bills including 33 trillion yen in the borrowings in the Special Account for Local Allocation Tax Borrowings: 69 Government bonds [excluding Treasury Discount Bill]: 650 (4) General government gross debt <Estimate for the end of FY2013> <Estimate for the end of FY2013> <Estimate for the end of FY2013> <Actual for the end of FY2011> Debt Management Policy Division, Office for Econometric Analysis, Cabinet Office Research Division, Budget Bureau, Ministry of Finance Economic Social Research Institute, Cabinet Office Financial Bureau, Ministry of Finance (Note 1) Special Account for Local Allocation Tax refers to Special Account for Local Allocation Tax and Local Transfer Tax. (Note 2) The figures in parentheses in item (2) and (3) do not include the front-loading issuance of refunding (20 trillion yen). (Note 3) Government bonds outstanding [ordinary government bonds] as of the end of FY2013 includes Reconstruction Bonds (12.2 trillion yen). (Note 4) Borrowings in the General Account in item (1) are part of the Borrowings in the Special Account for Local Allocation Tax which is transferred to the General Account. (Note 5) Long-term debt outstanding of local governments in item (2) includes local bonds, borrowings in the Special Account for Local Allocation Tax and local public corporation (22 trillion yen) charged to the ordinary account. (Note 6) Borrowings in item (2) and (3) = borrowings + subscription bonds, etc. Borrowings in item (2) do not include the borrowings outstanding in the Special Account for Local Allocation Tax (approx. 33 trillion yen), of which the redemption funds are burdens on local governments. (Note 7) The national government bonds in item (4) include ordinary government bonds, government compensation bonds and government bonds converted, and the borrowings, etc., include government subscription bonds, etc. 15

19 MEMO 16

20 8. International Comparison of Fiscal Conditions (1) International Comparison of General Government Financial Balance to GDP In the second half of the 1990s, Japan continued to run significant fiscal deficits while most of the major advanced countries improved their fiscal balance. Although at the beginning of the first decade of the 21st century Japan s fiscal balance showed a tendency to improve, it was worsened as in other major nations from the autumn of 2008 due to the effects of the global financial/economic crisis. In the 2010s, while other major advanced nations once again reduced fiscal deficits, Japan continued to suffer a huge deficit. (%) Germany Italy Canada France -5.0 UK US Japan (As a percentage of GDP) (CY) (As a percentage of GDP) CY Japan U.S U.K Germany France Italy Canada (Source) Based on the data included in Economic Outlook 93 issued by the OECD in June 2013, and not reflecting the data for the budget for FY2013 (Note 1) Figures represent the general government-based data (including the central/local governments and the social security funds), except for Japan and the U.S. where the figures of the social security funds are excluded. (Note 2) Figures for Japan are adjusted to exclude special factors. 17

21 (2) International Comparison of General Government Gross Debt to GDP 18 In terms of the ratio of general government debt to GDP, some major advanced countries were steadily implementing fiscal consolidation in the late 1990s. However, Japan s gross debt has rapidly worsened to reach the worst level among major advanced countries. (%) 240 Japan Italy 120 France US UK 90 Canada Germany (CY) (As a percentage of GDP) CY Japan U.S U.K Germany France Italy Canada (Source) OECD Economic Outlook 93 (June, 2013) (Note) Figures represent the general government-based data (including the central/local governments and the social security funds).

22 (3) International Comparison of General Government Net Debt to GDP Net debt means government s gross debt less government-owned financial assets (pension reserve consisting of insurance contributions paid by the people, etc.). Japan s net debt also stands at the extremely severe level among major advanced countries. When comparing net debt data, it is necessary to keep in mind that most government-owned financial assets are reserve funds that would cover social security benefits in the future and that it is impossible to immediately draw down these assets for redeeming the current debts or covering interest payment. (%) 150 Japan 125 Italy 100 US 75 UK France 50 Germany Canada (CY) CY Japan U.S U.K Germany France Italy Canada (Source) OECD Economic Outlook 93 (June, 2013) (Note) Figures represent the general government-based data (including the central/local governments and the social security funds). 19 (As a percentage of GDP)

23 MEMO 20

24 9. Problems of Fiscal Deficit If the budget deficits expand and the debts outstanding increase, there may be significant adverse effects on the domestic economy, financial administration and people s living as well as the global economy through a variety of factors such as the decrease in flexibility of policies due to the rise in national debt service costs, the widening generation gap, etc. Expansion of budget deficits (increase in the issuance of government bonds) Increase in debts outstanding (increase in the national debt services) Policy action becomes less flexible Increase in fund-raising activities conducted by government sectors Inhibiting fund-raising activities conducted by private companies (Decrease in production activities) Increased inequality among generations 100% 90% 80% 70% 60% Concerns over the brakes on spending due to the expected increase in future burdens (1) Policy action becomes less flexible Increase in interest rates due to loss of confidence in the financial administration (decrease in the price of government bonds) - Impact of adverse effects on the domestic and global economies through the financial sector and 20.7 stock markets. - Inhibition of fund-raising by the government (direct impact on people s living such as reduction in administrative services, etc.) The ratio of expenditure on national debt service to the General Account expenditures is rising at a consistent pace with increase in cumulative government bond issues, thus putting pressure on outlays needed to carry out other policy measures National Debt Service Local Allocation Tax Grants, etc. 50% % % % % % FY1960 FY1970 FY1980 FY1990 FY2000 FY2013 (Note) FY : Settlement, FY2013 Draft budget 21 Social Security related Expenditure Others Education & Science National Defense, etc. Public Works related Expenditures

25 (Reference 1) Interest Payments and Government Bonds Outstanding Japan has exceptionally high levels of outstanding debt not found in other countries. There is concern that its interest payment will significantly increase if interest rates rise in the future. (trillion yen) 10% 8% 20 6% 15 4% 10 2% 5 Interest rate weighted average (left scale) Interest payments (left scale) Government bond outstanding (right scale) (trillion yen) 800 0% (FY) (Note 1) Interest Payments for FY : Settlement; FY2013: Budget. (Note 2) Government bonds outstanding for FY : Actual; FY2013: Budget. (Note 3) Government bonds outstanding includes reconstruction bonds issued in FY2011, FY2012 and FY2013 (FY2011: 10.7 trillion yen, FY2012: 10.3 trillion yen, and FY2013: 12.2 trillion yen ), when measures and projects for reconstruction from the Great East Japan Earthquake are financed by reconstruction bonds as a temporary means until when the financial resources are secured by the revenues including the special tax for reconstruction. (Note 4) Interest rate weighted average above is the weighted average of the average interest rates (nominal) of 2-year, 5-year, 10-year, 20-year, 30-year, and 40- year bonds etc. that are scheduled for maturity in future redemption years (Reference 2) Interest Payments and Government Bonds Outstanding In bond markets, government bonds are playing a role as a benchmark, and the level of government bond interest rates affects the level of local government bonds and corporate bonds. The increase in the level of government bond interest rates gives rise to an increase in the level of interest rates on funds raised, and there will possibly be adverse effects on the economy and the financial power of local governments. (%) corporate bond (12 years) publicly-offered local bond (10 years) long-term government bonds(10 years) (Source)Bank of Japan Monthly Financial and Economic Statistics 22

26 (2) Increased fund-raising by government sector While financial liabilities incurred by general government have increased significantly in Japan as a result of accumulated fiscal deficits, liabilities incurred by non-financial corporations have decreased. With the saving ratio on the decline, further increase in liabilities incurred by general government in the future (i.e. increased fund-raising by general government) may hinder fund-raising by corporations in the domestic market, restrain investment, and restrict economic growth, while trying to facilitate private investment through growth strategies. Analysis of Financial Assets and Liability by Sector (End of FY1990 End of FY2012) Financial Asset Total: 2,361 3,403 Financial Liabilities Total: 2,389 3, General government (net: ) ,122 1, Households (net:675 1,205) Non-financial Corporations (net: ) 1, Overseas (net: ) FY1990, FY2012: settlement (Source)Bank of Japan Flow of Funds (Reference 3) Trends of Saving Ratio and Ratio of General Government Gross Debt / Households Net Financial Assets (%) (%) Saving ratio (right scale) General government gross debt / Households net financial assets (left scale) (Note) Households net financial assets are difference calculated by subtracting households gross debt from household gross financial assets. (Source) OECD National Accounts, Cabinet Office National Accounts (Reference 4) Ratio of General Government Gross Debt / Households Net Financial Assets in Major Advanced Countries (2011) General government gross debt Households net finanicial asset Japan U.S. U.K Germany France 1,096.9 trillion 1,189.8 trillion $16.0 trillion $ 37.2 trillion 1.6 trillion 2.8 trillion 2.3 trillion 3.2 trillion 2.2 trillion 2.7 trillion (Source) OECD "National Accounts" 23

27 (3) Increase in interest rates due to loss of confidence in the financial administration the European debt crisis 1 Abrupt increase in the level of government bond interest rates in GIIPS countries 24 The level of government bond interest rates in GIIPS countries (*) is abruptly rising, as the debt crisis emerged several times after the Greek government called for support in April * Of the euro area countries, those which may be subject to worsening of the fiscal situation are called GIIPS countries by combining the first letter of the name of each country (GIIPS: Greece, Ireland, Italy, Portugal and Spain). (Source) Bloomberg (Note) As Ireland s 10-year government bonds are not circulating in the market for now, this chart is based on the yield of interest of Ireland s 8-year government bonds. With regard to Greece s government bonds, the new issue bonds, which had been exchanged since March 12, 2012, have been traded.. This document adopts the interest rates of Greece s government bonds which have been issued since March 12, 2012, and are going to be redeemed in Trend in the rating of GIIPS countries according to Moody s Corporation ( ) Greece Ireland Italy Portugal Spain Aaa (end of 2008) (end of 2008) Aa Aa2 (end of 2008) (end of 2008) Aa A1 (end of 2008) A A Baa1 Baa2 Baa3 Ba1 Ba Ba3 B1 B B3 Caa1 Caa2 Caa3 Ca C Greece requested for aid Ireland requested for aid Portugal requested for aid Greece exchanged bond Spain requested for aid (Note) Ireland, Italy, Portugal and Spain had negative outlooks (Reference) Ratings of government bonds assigned by other major rating agencies. According to S&P ratings: Greece: B- (equivalent to B3), Ireland: BBB+ (equivalent to Baa1), Italy: BBB, Portugal: BB (equivalent to Ba2) and Spain: BBB- (equivalent to Baa3). *Outlook: Ireland: Positive, Greece: Stable, and Other countries: Negative. According to Fitch ratings: Greece: B- (equivalent to B3), Ireland: BBB+ (equivalent to Baa1), Italy: BBB+ (equivalent to Baa1), Portugal: BB+ (equivalent to Ba1) and Spain: BBB (equivalent to Baa2). * Outlook: Ireland and Greece: Stable, and Other countries: Negative

28 3 Measures taken by countries immersed in financial crises for restoring fiscal soundness, and the brought on people s living In GIIPS countries immersed in financial crises including Greece, severe measures have been taken such as substantial reductions in public pensions, medical benefits, etc. Greece Ireland Portugal Spain Size of the measures for restoring fiscal soundness (the year when the largest-size measures were taken) 14.3 billion euro Percentage of GDP: 6.6% (2011 (Note1) ) [30.9 trillion yen] (Note 2) 6 billion euro Percentage of GDP: 3.8% (2011) [18 trillion yen] 9.8 billion euro Percentage of GDP: 5.7% (2011) [26.8 trillion yen] 50.1 billion euro Percentage of GDP: 4.5% (2014) [21.2 trillion yen] Cuts in social security benefit payments, etc. - Substantial cuts in public pension payments (for each pensioner receiving approx. 170 thousand yen (1,700 euro) or more on a monthly basis, the amount to be withdrawn is increased to address the shortage of pension funds) - In addition, the monthly pension amounts exceeding approx. 120 thousand yen (1,200 euro) are cut by 20%. * The value added-tax rate is increased (from 19% to 23%) [From 2010] - The total public pension payments are reduced by 4% by cutting down on the amount of pension to be paid to each beneficiary receiving approx. 100 thousand yen (1,000 euro) per month. - Reduction in child allowances * Increase in the value-added tax rate (from 21% to 23%) [from 2012] - The amount of pension to be paid to each beneficiary receiving approx. 110 thousand yen (1,100 euro) per month is reduced by one seventh (approx. 14%). [2012 and 2013] (Also, the amount of pension to be paid to each beneficiary receiving approx. 60 thousand yen (600 euro) to 110 thousand yen (1,100 euro) per month is reduced cumulatively) - The amount of pension to be paid to each beneficiary is reduced by approx. 4%. [from 2012] - Increase in the copayments [from 2012] * Increase in the value-added tax rate (from 21% to 23%) [from January 2011] - Reduction in unemployment insurance benefits (in 6 months after the start of payments, the basic amount (Note) is reduced by 50%) (Note) Calculated based on salaries. Conventionally, 60% of the basic amount is paid over the entire payment period. * Increase in the value-added tax rate (from 18% to 21%) [from September 2012] (Note 1) The figure according to the budget for FY2011. In Greece, additional fiscal austerity plans are to be implemented by drawing up 6.5-billion-euro (percentage of GDP: 2.9%) measures for restoring fiscal soundness, etc., as part of mid-term fiscal strategies (June 2011). (Note 2) The figure shown in a pair of brackets ([ ]) refers to the size of the measure taken by each country for one fiscal year for restoring fiscal soundness, which was converted to the scale of Japan economy. (Source) World Economic Outlook Database issued by IMF in April 2012, National Accounts issued by the Cabinet Office, etc. (Reference) Financial situations in GIIPS countries The financial situations in GIIPS countries are not extremely bad in comparison with that of Japan. However, 基礎的財政収支対 they are obliged GDP to 比 carry out financial restoration 債務残高対 amid the difficult GDP 比 economic conditions. Primary balance to GDP Greece Ireland Italy Portugal Fiscal balance to GDP Greece Ireland Italy Portugal Spain (Reference) Japan Greece Ireland Italy Portugal Spain (Reference) Japan Spain (Reference) Japan General government gross debt to GDP (Source) OECD, Economic Outlook Cabinet Office, Economic and Fiscal Projections for Medium- to Long-Term Analysis published, and submitted to the Council on Economic and Fiscal Policy on Aug. 8th, 2013 (Note 1) The fiscal revenues and expenditures, and outstanding debts are on a general government basis (aggregation of the central government, local governments and social security funds). However, social security funds are excluded for Japan s fiscal revenues and expenditures. (Note 2) Japan s fiscal revenues and expenditures are the figures for one single year excluding special factors.

29 MEMO 26

30 10. Indicators used to set the Objectives of Fiscal Consolidation The stock indicators that show cumulative debts, and the flow indicators that show each year s fiscal balance are used when setting the objectives of fiscal consolidation. <Stock Indicators> Ratio of debt outstanding to GDP The ratio of debt outstanding to GDP is the indicator used to compare the debts incurred by the central and local governments to gross domestic product (GDP). Importance is attached to this indicator when promoting fiscal consolidation, as it indicates the size of debt piled up by the central and local governments in relation to the scale of the economy. <Flow Indicators (1)> Primary Balance The Primary Balance (PB) is an indicator that shows to what extent the expenditure required to implement policy measures in a given timeframe is covered by tax revenues in the same timeframe. At present, the primary balance is in the red in Japan with expenditures for policy measures exceeding tax revenues (See Fig. A on the next page). When the primary balance is in equilibrium, the numerator and the denominator in the ratio of debt outstanding to GDP change as below. Debt Outstanding GDP When the primary balance is in equilibrium, the debt outstanding is increased by interest payment, which is calculated by multiplying debt outstanding by interest. Therefore, debt outstanding grows in proportion to the level of interest rates as long as the primary balance continues to be in equilibrium. On the other hand, GDP increases or decreases in proportion to the economic growth rate. This means that the change in the ratio of debt outstanding to GDP as a whole is affected by interest rates and the economic growth rate. These can be summarized as follows: When the primary balance is in equilibrium, Ratio of debt outstanding to GDP rises if nominal interest rate exceeds nominal GDP growth rate Ratio of debt outstanding to GDP remains constant if nominal interest rate is equal to nominal GDP growth rate Ratio of debt outstanding to GDP decreases if nominal GDP growth rate exceeds nominal interest rate The primary balance needs to maintain a certain level of surplus in order to lower the ratio of debt outstanding to GDP at a steady pace. 27

31 <Flow Indicators (2)> Fiscal Balance Even if primary balance is in equilibrium, the actual amount of debt outstanding will increase by interest payments. In order to stop this, we have to achieve equilibrium in fiscal balance including interest payments. Moreover, when fiscal balance is in equilibrium, the amount of new debts is equal to the amount of repayment of past debts (See Fig. C). For fiscal consolidation objective, primary balance equilibrium is used in Japan, Fiscal balance equilibrium is used in other countries. Figure A: Current Situation Figure B: Primary Balance Equilibrium Figure C: Fiscal Balance Equilibrium (Revenues) (Expenditures) (Revenues) (Expenditures) (Revenues) (Expenditures) Debt Fiscal Balance (deficit) Redemption of the debt Redemption of the debt Debt Redemption of the debt Debt Fiscal Interest payments Balance Interest payments Interest payments Fiscal Balance (equilibrium) PB (surplus) PB (deficit) Expenditures for Policy Measures Tax revenues, etc. PB (deficit) PB (equilibrium) Expenditures for Policy Measures Tax revenues, etc. PB (deficit) Expenditures for Policy Measures Tax revenues, etc. Strictly speaking, we need to subtract interest income from revenues when calculating the primary balance, but this has been omitted to simplify calculation. (Reference) Trends in Primary Balance of Central and Local Governments to GDP SNA (as percentage of GDP) Primary balance of Central and Local Governments Primary balance of Central Government (FY) (Source) FY : Cabinet Office "Annual Report on National Accounts" FY : Cabinet Office "Economic and Fiscal Projections for Medium to Long Term Analysis (Note 1) The long-term debts of Japan National Railways and the cumulative debts of national forests are excluded for FY1998, the Fiscal Loan Fund of the special account for the fiscal investment and loan program (the special account for the Fiscal Loan Fund for 2006) transferred to the special account for the Government Debt Consolidation Fund or the general account are excluded for 2006, 2008, 2009, 2010 and 2011, the debts transferred from Japan Expressway Holding and Debt Repayment Agency to the general account are excluded for 2008, and the debts transferred from Japan Railway Construction, Transport and Technology Agency to the general account are excluded for (Note 2) Excluding the expenditures for the recovery and reconstruction measures from FY2011 to FY Primary balance of Local Government

32 11. Pathway for Fiscal Consolidation The government of Japan formulated fiscal management strategies including the Basic Policies for Economic and Fiscal Management and the Medium-term Fiscal Plan toward fiscal consolidation. Outline of Basic Policies for Economic and Fiscal Management and Reform - Ending Deflation and Revitalizing the Economy - (June 14th, 2013, Cabinet Decision) Targets for fiscal consolidation: Chapter 3: Pursuing both economic revitalization and fiscal consolidation 2. Fiscal consolidation policies (Toward medium- to long- term fiscal consolidation) Aiming for a positive cycle in which the "three-arrows" strategy realizes a strong economy, economic revitalization facilitates fiscal consolidation, and progress in fiscal consolidation contributes to further economic revitalization, efforts will be made to realize both sustainable growth and fiscal consolidation. Through such efforts, Japan will aim by FY2015 to cut the national and local primary balance deficit to GDP ratio by half from the ratio in FY2010, to make it in surplus by FY2020, and to steadily decrease the debt balance to GDP ratio thereafter. (Reference) Outline of fiscal consolidation provided in Basic Policies for Economic and Fiscal Management and Reform Pursuing both economic revitalization and fiscal consolidation Broad directions of fiscal consolidation: The Medium-term Fiscal Plan shall be prepared as early as possible. An economic and fiscal projection for the medium- to long-term analysis shall also be presented. To achieve this goal by FY2015, expenditure, including non-discretionary expenditure, shall be scrutinized. The PDCA cycle will be applied strictly. A steady reduction in the gap between expenditure and revenue in terms of their GDP ratio will be required to achieve the goal of a primary surplus by FY2020. Basic stance for the prioritizing and streamlining of the major expenditure items Social security: Healthy aging and the wider use of ICT and generics should be promoted with the aim of developing the system to provide social security services efficiently and improving the health of people effectively. The reform of the social security system should be discussed to make further progress in the comprehensive reform of social security and tax. Social infrastructure development: Measures shall be taken to (1) prioritize projects, (2) utilize social infrastructure more efficiently and effectively by extending the life-cycle and make it more costeffective, and (3) actively promote conversion to Public-Private Partnership (PPP) / Private Finance Initiative (PFI) to utilize funds and skills in the private sector. Local government finance: It is necessary to switch from an emergency mode to normal mode in line with economic recovery, while securing the necessary revenue. Fiscal consolidation targets The Government aims to halve the primary deficit of the national and local governments to GDP ratio by FY2015 from the ratio in FY2010 and to achieve a primary surplus by FY2020, thereafter the Government will seek to steadily reduce the public debt to GDP ratio. 29

33 Basic framework for Fiscal Consolidation: Medium-term Fiscal Plan (Approved by the Cabinet on August 8, 2013) 30 I. Basic Understanding The Government seeks to achieve nominal GDP growth of around 3% and real GDP growth of around 2% on average over the coming decade (from FY2013 to FY2022). The Government creates a virtuous cycle between sustainable economic growth led by private demand and fiscal consolidation. II. Fiscal consolidation targets The Government aims to halve the primary deficit of the national and local governments to GDP ratio by FY2015 from the ratio in FY2010 and to achieve a primary surplus by FY2020, thereafter the Government will seek to steadily reduce the public debt to GDP ratio. III. (1/2) Achieving the target for FY Basic initiatives It is necessary to reduce the primary deficit of the National Government s General Account, which accounts for a large part of the primary deficit of the national and local governments. The Government aims to improve the primary balance of the General Account at least by approximately 4 trillion yen both in FY2014 and FY2015, and brings down the General Account s primary deficit to around 19 trillion yen in FY2014 and to around 15 trillion yen in FY2015, thereby seeking to achieve the target to halve the primary deficit of the national and local governments. The Government will make its utmost efforts to keep the amount of newly issued National Government bonds below that of the preceding fiscal year for the FY2014 and FY2015 budgets. In terms of local government finances, from the viewpoint of stable management, together with keeping expenses down in line with the efforts of the national government, total general revenues needed for stable fiscal management of local governments in FY2014 and FY2015, including those which receive grants under the Local Allocation Tax Act, should be maintained virtually at the same level as in the FY2013 Fiscal Plan of Local Governments, and not below.

34 Basic framework for Fiscal Consolidation: Medium-term Fiscal Plan (Approved by the Cabinet on August 8, 2013) 31 III. (2/2) Achieving the target for FY Initiatives on the expenditure and revenue sides Social security: The Government seeks to control the overall level of social security expenditure to the extent possible amid an upward trend mainly due to population aging and advances in medical technologies. The Government will also make its utmost efforts, by resolving the issue of the exceptionally high levels of public pension benefits, the elimination of which is a pre-requisite for invoking the macroeconomic-slide mechanism, as well as ensuring concrete progress in enhancing efficiency in promoting the use of generic medicine. Infrastructure: The Government will apply a selection and focus strategy by prioritizing projects with a high return on investment, in combination with non-infrastructure measures. Public finances of local governments: As the economy recovers, there is a need to proceed with normalizing the crisis-response mode following the Lehman Shock. IV. Achieving the target for FY2020 The Government will improve the primary balance of the General Account, just as is the case for efforts to be pursued until FY2015, and turn it into a surplus. On the expenditure side, the Government will gradually reduce the primary expenditure to GDP ratio by controlling the primary expenditure to the extent possible through eliminating wasteful expenditure in each year s budget, while increasing GDP through economic growth. On the revenue side, the Government will seek to expand tax revenues through economic growth. In the process of making these efforts, the Government will consider securing financial resources for social security spending that has been on the rise mainly due to population aging, through measures both on the expenditure and revenue sides, including any necessary reforms of the systems. (Reference) Forecast of the Primary Balance Primary balance of the national and local governments FY2013: a deficit of 34.0 trillion yen FY2015: a deficit of around 17.1 trillion yen Targets for the primary balance of the General Account FY2013 FY2014 FY2015 a deficit of 23 trillion yen a deficit of around 19 trillion yen a deficit of around 15 trillion yen

35 32 (Reference) Outline of Economic and Fiscal Projections for Medium- to Long- Term Analysis submitted to the Council on Economic and Fiscal Policy by the Cabinet Office on Aug. 8th, 2013 Economic Scenarios and Basic Assumptions on Public Finance Economic Scenarios ( Economic Revival Case and Reference Case ) Economic Revival Case :The average annual growth rate for the FY2013-FY2022 period is approximately 3 % in nominal and 2 % in real terms. Reference Case :The average annual growth rate for the FY2013-FY2022 period is approximately 2 % in nominal and 1 % in real terms. Basic Assumptions on Public Finance Based on Medium-term Fiscal Plan (Aug. 8 th, 2013), the Government aims to improve the primary balance of the General Account by approximately 4 trillion yen in FY2014 and in FY2015 respectively. Based on the current legislation, the consumption tax rate (central and local) is raised to 8 % on Apr. 1 st, 2014, and to 10 % on Oct. 1 st, ( )Regarding the hikes in the consumption tax rate, the Government will make a decision in this autumn, taking into consideration economic conditions and other factors in a comprehensive manner. If a decision different from the current legislation is made, the projections will be revised accordingly. Results of Projections (%) <Primary Balance of the Central and Local Governments (ratio to nominal GDP)> FY % * * FY % % * Economic Revival Case Reference Case PB Target of Central and Local Governments (FY) (Note)Excluding the expenditures and fiscal resources for the recovery and reconstruction measures related to the 2011 Earthquake. <Central Government s General Account ( Economic Revival Case )> (unit: trillion yen) FY2013 FY2014 FY2015 (A) tax revenue (B) Primary Balance expenditure Primary Balance of the General Account (C)(=(A)-(B)) Improved by approximately 4 trillion yen in FY2014 and in FY2015 respectively <Outstanding Central and Local Governments'Debt ( Economic Revival Case )> Outstanding Central and Local Governments'Debt (unit: ratio to nominal GDP) FY2015 FY2020 FY On the Economic Revival Case, a primary deficit of the central and local governments to nominal GDP ratio is projected to be around 3.3 % in FY2015 with the fiscal consolidation target of halving it from the ratio in FY2010 being achieved. In order to achieve a primary surplus by FY2020, additional efforts for improving fiscal condition will be needed. On the Reference Case, tax revenue would be lower and expenditure is assumed to remain the same compared with the Economic Revival Case. Thus, the FY2015 fiscal consolidation target would not be achieved, and additional efforts for improving fiscal condition will be needed.

36 12. The Comprehensive Reform of Social Security and Tax 33 The Japanese social security system is characterized by a growing dependence on public funds that surpasses the increase in social security insurance fee, despite the fact that the government has adopted a social insurance system. In addition, even though the public funds are supposedly covered by tax revenues, special deficit financing bonds have been issued to cover national contribution, which will eventually become fiscal burden for future generations. (trillion yen) The sum of social security spending Social Security Benefits 1 trillion yen (4%) 5 trillion yen 4 trillion yen 3 trillion yen (4%) 34 trillion yen 10 trillion yen (29%) 19 trillion yen (56%) 25 trillion yen 66 trillion yen 40 trillion yen (60%) 47 trillion yen 13 trillion yen (20%) 11 trillion yen (10%) 90 trillion yen 78 trillion yen 20 trillion yen (22%) 55 trillion yen (61%) 5 trillion yen (6%) 110 trillion yen 111 trillion yen Public funds (Local government) Public funds (Central government) 30 trillion yen (27%) Social Security Insurance Fee 62 trillion yen (56%) (Based on the budget) (Note 1) Expenses for social security benefits shall refer to the total amount paid through the public social security system. (Note 2) Before FY2000, the expenses for FY2009 social security benefits (National Institute of Population and Social Security Research) (Note 3) The difference between the total amount provided by the financial source for social security and the actual expenses for social security benefits each fiscal year is caused by differences in income and pension expenditures (accumulated pension reserve), etc. In order to prevent the increase in fiscal burden on future generations, the consumption tax will be raised to 8% in April 2014, and then to 10% in October 2015, along with the comprehensive reform of social security and taxes. The National Council on Social Security System Reform compiled a report on August 6, 2013, advocating the need to minimize the burden on future generations that will support society in the future, while simultaneously reforming the social security system and achieving fiscal consolidation. Report from the National Council on Social Security System Reform (summary) (August 6, 2013) Expenses related to social security account for more than 40% of primary balance expenses, while tax revenues cover less than half of the total expenditure, meaning that a considerable portion of fiscal burden for the expenses related to social security will be passed onto future generations that will support society in the future. If social security insurance fee equivalent to the social security benefits now being enjoyed are not ensured, and the shortfall is to be consequently filled by future generations that will support society in the future, it would pose a significant problem from the standpoint of fiscal consolidation, sustainable social security, and fairness among generations. This issue must be promptly addressed in order to minimize the burden on future generations that will support society in the future. Even though society is rapidly aging, we must think seriously about what the current generation can do to minimize the burden on future generations that will support society in the future. In any case, social security will no longer function if the benefits do not match the burden, thereby resulting in a loss of social vigor. Therefore, the social security system must be reformed along with achieving fiscal consolidation. (FY)

37 The Act to Promote Social Security Reform states: From the standpoint whereby all generations should fairly share the expenses regarding social security that widely benefits citizens, revenue from the consumption tax and local consumption tax shall be used as a major source of revenue that is necessary for the national and local governments to pay social security benefits. Due to the recent Comprehensive Reform of Social Security and Tax, all consumption tax revenue that includes increased revenue due to the raised consumption tax rate (excluding national/local consumption tax revenues and ongoing local consumption tax revenue) shall be used for social security. Securing stable financial resources for social security < Without taking into account the social security reform> Four social security expenses (Central and Local government) 37.8 trillion yen < With taking into account the social security reform> Four social security expenses (Central and Local government) 44.5 trillion yen Enhancing social security 2.8 trillion yen Increasing expenditures accompanied by raising consumption tax rate (0.8 trillion yen) Government contribution to the basic pension funds 3.2 trillion yen Difference 19.3 trillion yen Difference 26.6 trillion yen 37.8 trillion yen Consumption tax revenue 4% (Central and Local government) (excluding current Local consumption tax revenue) 11.2 trillion yen 37.8 trillion yen Using all additional tax revenues from the consumption tax hike for social security spending. 2.8 trillion yen 0.8 trillion yen 3.2 trillion yen 7.3 trillion yen Lower the burden on future generations Consumption tax revenue 4% (Central and Local government) (excluding current Local consumption tax revenue) 11.2 trillion yen For enhancing 1% For stabilizing 4% Increased revenue by raising consumption tax ( trillion yen) 14 (Note 1) The calculation is an estimate as of FY2017. (Note 2) Other than the four expenses for social security in the figure above, unilateral local projects within the range are also based on the four expenses for social security. (Note 3) The Local Tax Act stipulates that the increased local consumption tax shall be used as expenses required for social security measures. The Act also stipulates that the total amount of increased local consumption tax and the statutory rate of allocated consumption tax shall be compared with the total expenses of local social security benefits that include unilateral local projects, which shall be confirmed every fiscal year as being a financial source for social security. 34

38 All of the increased revenue by raising consumption tax shall be used to enhance and maintain social security. Along with the permanent raise of national contribution ratio to basic pensions to 50% in order to maintain social security, the following measures are scheduled to enhance social security. Enhancement of the social security system through Comprehensive Reform of Social Security and Tax Child and childcare Medical system and long-term care Pension (Qualitative and quantitative) enhancement of support for child and childcare (e.g. addressing the problems of waiting-list children) Comprehensive promotion and enhancement of regional support for child and childcare as well as infant education and care through the implementation of new system to support child and childcare Implementation of the Plan for Accelerating the Elimination of Children Wait-listed for Childcare Urgent project to secure childcare services to allow smooth transition to the new system Enhancement of social nursing etc. Reform of the system of provision of medical and long-term care services 1 Promotion of functional division and collaboration of hospital, home healthcare and inhome care Enable early transition to in-house care and rehabilitation by promoting division of roles and collaboration among hospitals and smoothing the process from onset to hospitalization, rehabilitation and hospital discharge. Promote in-house medical and long-term care and support the continuation of community life. Secure health-care staff such as doctors and nurses. (Considering the establishment of new system of financial support and the appropriate way to deal with the medical service fee, and taking necessary measures accordingly) 2 Establishment of local comprehensive care system The following measures are implemented in order to establish local comprehensive care system which provides long-term and medical care, disease prevention, livelihood support and residence in an integrated manner and allows community life even when in need of longterm car ⅰ) Collaboration between medical and long-term care ⅱ) Developing the system of livelihood support and prevention of long-term care ⅲ) Measures to address dementia ⅳ) Review of support for those who need care according to the situations of each local community ⅴ) securing manpower etc. Etc. Establishment of fair and stable system regarding refractory diseases and specific chronic disease for childhood Improvement of existing system Reform of the system of medical and long-term care 1 Stabilization of financial basis of medical insurance system Increase of financial support for national health insurance covering many low-income earners (including the increase of financial support assumed prior to the reform of insurers and management of national health insurance) Government subsidy for Japan Health Association 2 Securing fairness related to people s burden on insurance fee Enhancement of measures to reduce insurance fee for national health insurance paid by lowincome earners Introduction of calculation of levy on longterm care in proportion to the total amounts of insured person s wage 3 Revision on medical care covered by the medical insurance system, etc. Review of expensive medical treatment cost while giving consideration for low-income earners Division of functions among hospitals and review of benefit for clinic and hospitalization from the perspective of ensuring fairness compared with in-home care 4 Prioritization and rationalization of long-term care benefit Review of the burden on long-term care insurance fee for people above certain level of income 5 Reduction of burden on long-term care insurance fee for the 1 st class insured people with low income Etc. Welfare benefits for the elder and disabled with low income Reduction of benefit entitlement period Expansion of survivors pension to single-father family. About 0.7 trillion yen About 1.5 trillion yen Enhancement, prioritization and sophistication shall be jointly implemented. About 0.6 trillion yen Total expenses required (public expenses) = About 2.8 trillion yen (Note) The table above summarizes social security as enhanced through the use of the increased consumption tax income that influences public expenses. 35

39 MEMO 36

40 13.International Trends toward Fiscal Consolidation Since the onset the global financial and economic crisis in the fall of 2008, major advanced countries have taken economic stimulus measures in order to under pin growth and employment. At the same time, each country recognizes that, in order to bring about sustainable growth, the exit strategy is needed so that these exceptional policy measures are withdrawn when economic recovery is assured. Under these circumstances, Japan s fiscal consolidation targets are internationally recognized since the G20 Toronto Summit on June Moreover, in the St. Petersburg Summit on September 2013, Japan explained Medium-Term Fiscal Plan and it is acknowledged that all advanced economies have developed credible, ambitious, and country-specific medium-term fiscal strategies in the G20 Leader s Declaration. The G-20 Toronto Summit (June 26-27, 2010) Declaration, advanced economies have committed to fiscal plans that will at least halve deficits by 2013 and stabilize or reduce government debt-to-gdp ratios by Recognizing the circumstances of Japan, we welcome the Japanese government s fiscal consolidation plan announced recently with their growth strategy. Those with serious fiscal challenges need to accelerate the pace of consolidation. The G-20 Los Cabos Summit (June 18-19, 2012) The Los Cabos Growth and Jobs Action Plan Advanced economies will ensure their fiscal finances are on a sustainable track. Recognizing the importance of strengthening and implementing their medium-term fiscal consolidation plans, the US and Japan commit to actions that will lead to steady reduction in their public debt-to-gdp ratios: Japan reaffirms its commitment to meet its primary balances targets for FY2015 and FY2020, and to reduce its debt-to-gdp ratio from FY2021 onwards. By our next Summit, members agree to identify credible and ambitious countryspecific targets for the debt-to-gdp ratio beyond 2016, where these do not currently exist, accompanied by clear strategies and timetables to achieve them. These strategies will consider tax and expenditure reforms, including modifications to entitlements. The G-20 St. Petersburg Summit (September 5-6, 2013) Declaration Achieving a stronger and sustainable recovery, while ensuring fiscal sustainability in advanced economies remains critical. As agreed, all advanced economies have developed credible, ambitious, and country-specific medium-term fiscal strategies. These strategies will be implemented flexibly to take into account near-term economic conditions, so as to support economic growth and job creation, while putting debt as a share of GDP on a sustainable path. St. Petersburg Action Plan As agreed, all advanced economies have put forth strategies that are geared toward maintaining or lowering the debt-to-gdp ratio over the medium term. Japan will seek to steadily reduce the public debt-to-gdp ratio after achieving a primary surplus by fiscal year

41 14.Comparison in Targets for Fiscal Consolidation in Major Advanced Countries Major advanced countries are taking measures to ensure sustainable public finance in the medium-term by setting new objectives in order to consolidate the public finance worsen by the response to economic downturn. 38 Fiscal Consolidation Targets Forecast (Fiscal balance to GDP 3) Debt outstanding to GDP (2012) Projected nominal GDP growth rate ( ) U.S. - A total of 4 trillion dollars of financial deficit (central government) shall be reduced in 10 years. (Of this reduction, the deficit has already been reduced or will be reduced by approx. 2.5 trillion dollars.) [President s Budget Message for FY2014 (April 2013), St. Petersburg Fiscal Templates- G-20 Advanced Economies (September 2013)] -7.0%(2012) -2.6%(2017) 72.6% (Federal, held by the public) Average 4.8% U.K. - For the foreseeable 5-year period, a surplus is achieved in the cyclically-adjusted current balance ( 1) of the public sector (general governments + public corporations. - By FY2015, the outstanding net debts in the public sector as a percentage of GDP will be reduced. ( According to economic and financial projections made by the government in December 2012, the goal will be achieved in 2017.) [Fiscal Responsibility Charter (April 2011), St. Petersburg Fiscal Templates- G-20 Advanced Economies (September 2013)] -7.4%(2012) -2.2%(2017) (public sector) 75.9% (public sector) Average 3.5% France - By FY2015, the fiscal revenues and expenditures of general governments will be maintained 3% or less as a percentage of the GDP. [Adopted at the Economic and Financial Affairs Council (June 2013)] - By FY2017, a surplus will be achieved in the structural balance of fiscal revenues and expenditures of the general government ( 2). [St. Petersburg Fiscal Templates- G-20 Advanced Economies (September 2013)] -4.8%(2012) -0.7%(2017) 90.2% (general governments) Average 2.9% Germany - By FY2014, the fiscal revenues and expenditures will be approximated to a state of balance. [St. Petersburg Fiscal Templates- G-20 Advanced Economies (September 2013)] - The structural balance of fiscal revenues and expenditures of the federal government as a percentage of GDP is limited to 0.35% or less (the transitional period starts in FY2011, and this policy will be officially adopted in FY2016). [Constitutional revision (July 2009)] 0.1%(2012) 0.5%(2017) 81.9% Average 2.8% (Reference) 1 The (cyclically-adjusted current budget balance) is calculated by deducting the current expenditures except capital expenditures such as public work projects from current revenues such as tax revenues, and excluding variations in the revenues and expenditures due to economic fluctuations). 2 Structural treasury budget shall refer to the actual treasury budget minus temporal factors and factors fluctuating due to the economic climate. 3 Descriptions in this column are based on treasury budget regardless of indicators used for the goals of sound finances in individual nations, such as the current balance as adjusted for the economic cycle and structural treasury budget. 4 In the EU, it has been decided that, in principle, the ratio of general government fiscal deficits to GDP should not exceed 3% and the ratio of debt outstanding to GDP should not exceed 60% as the basis for starting the excessive deficit procedure (EDP). Moreover, when the EDP has started sanctions will be put into place after giving recommendation and notice. (Source) St. Petersburg Fiscal Templates- G-20 Advanced Economies (September 2013) (Reference) Pace of Fiscal Consolidation in Major Countries

42 15.Declining Birthrate and Aging Population Japan s social security system was developed in the 1960s and in the first-half of the 1970s. In this era, Japan enjoyed high economic growth with increase in tax revenues and social security contributions. In terms of population structure, the number of people aged 20-64, who shored up the social security system, was nine times as much as that of people 65 and over. While Japan continued a high growth rate until the collapse of the bubble economy in the early 1990s, the population structure changed and the number of people aged declined to approx. 5 times as much as that of people aged 65 and over. After the collapse of the bubble, moreover, the Japanese economy was suffered from low growth rate. Against a rapidly declining birthrate and aging population, the number of people aged has dropped to approx. 2.3 times as much as that of people aged 65 and over in Under these circumstances, it has become an important issue to build a sustainable social security system taking the outlook for the future population structure into consideration. (1) Trends in the Japanese economy and the structure of population 1961 Universal Pension Coverage and Health Care Coverage 1973 First Year for Welfare Society Introduction of free medical services for the elderly, major hike in pension benefits and introduction of consumer price- and wage-linked systems Nominal GDP Growth (%) Population (thousand) / component ratio Total population 98,280 Total population 123,610 Total population 127,250 Total population 120,660 Total population 97,080 Age 65 and over Age Age 19 and under Age population Age 65- population 9.1times 5.1times 2.3times 1.8times 1.2times (Source) The nominal GDP growth rate shown in the National Accounting issued by the Cabinet Office (1965: Authentic information for FY1998, 1990: Authentic information for FY2011), data for FY2013 according to the economic forecast by the Cabinet Office, demographic composition as of 1965, data for 1990 according to the National population census conducted by the Ministry of Internal Affairs and Communications, and data for 2013 onwards according to Japan s demographic composition in the future (estimation as of January 2012) issued by the National Institute of Population and Social Security Research. 39

43 (2) Change in the population structure by age group Thousand people Total population million 2013 Age population Age 65- population Second Baby Boomers (38-41 years old) 7.94 million First Baby Boomers (63-65 years old) 6.59million Age 65 and over About 50% of national health care expenditures Start to receive Basic Pension benefits Category 1 Insured Persons in Long- Term Care Insurance System Aged 19 and under 22,300 (18%) Aged ,970 (57%) Aged 65 and over 31,970 (25%) 2.3 (old) Total population million 2015 Second Baby Boomers (41-44 years old) 7.90 million First Baby Boomers (66-68 years old) 6.42million 2.1 Aged 19 and under 21,760 (17%) Aged ,890 (56%) Aged 65 and over 33,950 (27%) Total population million 2025 Second Baby Boomers (51-54 years old) 7.72 million First Baby Boomers (76-78 years old) 5.55 million 1.8 Aged 19 and under 18,490 (15%) Aged ,590 (54%) Aged 65 and over 36,570 (30%) (Note) The first baby boomers are those who were born in The second baby boomers are those who were born in (Source) National Institute of Population and Social Security Research Japanese Future Demographic Projection (Dec. 2012) 40

44 16.Trends in Social Security Benefits and Social Insurance Contributions Social security benefits has increased significantly in Japan with the progressively aging population. On the other hand, the growth of social insurance contributions leveled off in recent years. As a result, the difference between social security benefits and social insurance contributions is widening. This gap is covered by the central and local governments using tax revenues. Social Security Benefits Social Insurance Contributions (GDP) Total amounts of cash and services, provided to the Japanese people through the social security system. 21.6% (as percentage of GDP) (Example) Pension benefits Medical and long-term care benefits (excluding individually assessed charges) Social Security Benefits (trillion yen) 10.5% (as percentage of GDP) (Reference) GDP (trillion yen) Social Insurance Contribution (trillion yen) (Source) National Institute of Population and Social Security Research The cost of Social Security Benefits 41 (FY)

45 7.Social Security Benefits and the Present Situation of Fiscal Resources Expenditure on social security benefits for FY2013 is expected to be around 110 trillion. This expenditure is covered by insurance contributions, and the central and local government expenditure. Social Security Benefits (FY2013 initial budget basis) Benefits trillion Fiscal Resource trillion + Assets income Long-term Care, Welfare, etc trillion of which, Long-term Care 9.0 trillion Assets income, etc. Local Taxes, etc trillion Relation with the General Account Expenditures Former Military Personnel Pensions 0.5trillion Medical Care 36.0 trillion National Taxes (Note) 29.7 trillion Covering this position Social Security (Note) 29.1 trillion Pension 53.5 trillion Contributions 62.2 trillion The funding sources of social securityrelated expenditures are national tax revenues and government bond issues (borrowings). Social Security related expenditures are expected to increase by about 1 trillion each fiscal year. (Note) The figure is based on the share of government contribution to the basic pension funds to 50%. (Reference) The Percentage of Social Security Expenditures in the Government General Account Revenues and Expenditures When the FY2013 General Account is compared with the FY1990 General Account, we find that the increase in social security costs accounts for the majority of the growth of General Account Expenditures, while the fall in tax revenues and the rise in social security costs are linked to the increase in the amount of government bond issues. (Unit : trillion yen) (Note)Initial Budget based 42

46 18.Government Revenues and Expenditures in OECD Member Countries From FY1995 to FY2010, government expenditures have increased due to the increase in social security expenditures, whereas the tax revenues have decreased and the conditions of fiscal revenues and expenditures have worsened. Expenditures not relating to social security have dropped to the lowest level among the OECD member countries. General Government Total Expenditures (as a percentage of GDP) Sweden Ireland Finland Denmark Denmark France Netherlands Finland Austria Austria Hungary Belgium Germany Sweden France Greece Czech Republic Portugal Israel Netherlands Italy Italy Belgium United Kingdom Norway Hungary Slovak Republic Germany Greece Spain Spain Norway United Kingdom Israel Portugal Czech Republic Estonia Luxembourg Ireland United States Luxembourg Estonia United States Japan Japan 24Korea Slovak Republic 24Korea General Government Social Security Expenditure (as a percentage of GDP) General Government Non-Social Security Expenditure (as a percentage of GDP) *excluding interest payment costs Sweden Denmark Finland 3Denmark France Finland Austria 5France 6Germany 7Norway 8Belgium 9Netherlands 10Hungary 11Italy 12United Kingdom 13Luxembourg 14Spain Austria 5Sweden 6Italy 7Germany 8Belgium 9United Kingdom 10Greece 11Netherlands 12Ireland 13Norway 14Portugal Ireland Japan Greece Spain Slovak Republic 18Czech Republic 19Portugal 20Israel 21Estonia 22Japan 23United States Luxembourg 18Hungary 19Czech Republic 20Estonia 21Slovak Republic 22United States 23Israel Czech Republic Ireland Israel 3Slovak Republic 4Sweden 5Netherlands 6Finland 7Germany 8Estonia 9Hungary 10Norway 11Austria 12France 13Denmark 14Spain 15Portugal 16Belgium 17United States 18Japan 19Luxembourg 20United Kingdom Portugal 3Netherlands 4Israel 5Hungary 6Sweden 7Finland 8Denmark 9France 10Belgium 11United States 12United Kingdom 13Czech Republic 14Spain 15Estonia 16Austria 17Slovak Republic 18Greece 19Luxembourg 20Norway 21Italy 22Ireland Germany Italy 23Greece Japan (Source)OECD Stat Extracts National Accounts EU Euro stat Government Finance Statistics (Note1)Figures represent the general government-based data (including the central/local governments and the social security funds). (Note2)The total expenditures of the government include interest payment costs. 43

47 General Government Tax Revenue (as a percentage of GDP) General Government Financial Balance (as a percentage of GDP) (Source)OECD Revenue Statistics, National accounts, Economic Outlook93,CAO National Accounts etc. (Note 1) The tax revenues are on a general government basis (Aggregation of the central government, local governments and social security funds). (Note 2) The fiscal revenues and expenditures are on a general government basis (aggregation of the central government, local governments and social security funds). However, social security funds are excluded for Japan, and the US s fiscal revenues and expenditures. Also, Japan s fiscal revenues and expenditures for FY2013 are the figures for one single year excluding special factors. (Reference) Relationship between Social Security Expenditures and the National Burden Ratio in Major Advanced Countries In comparison with the OECD member countries, Japan s social security expenditures remain moderate while the national burden ratio remains low. (Source) National Burden Ratio: OECD National Accounts, Revenue Statistics, Cabinet Office National Accounts etc. Social Security Expenditure: OECD Stat Extracts National Accounts. (Note 1) The figures represent the general government-based data (including the central and local governments and the social security funds). (Note 2) National Burden Ratio : For other countries, the figures are actual for For Japan, the figure for FY2010 is actual. For New Zealand, the figure for 2005 is actual. For Canada, the figure for 2006 is actual. (Note 3) Social Security Expenditure : For other countries, the figures for 2010 are actual. For Japan, the figure for FY2010 is actual. For New Zealand, the figure for 2005 is actual. For Canada, the figure for 2006 is actual. 44

48 (Reference) International Comparison of National Burden Ratio Comparison with major advanced countries [ National Burden Ratio = Total Taxes as a percentage of National Income (NI) + Social Security Contribution as a percentage of NI ] [ Potential National Burden Ratio = National Burden Ratio + Fiscal Deficit ] (NI:%) Social Security Contribution as percentage of NI Total Tax as percentage of NI Fiscal Deficit as percentage of NI (29.4) (25.4) (39.2) (34.8) National Burden Ratio *Figure in paretheses are percentage of GDP Potential National Burden Ratio *Figure in Paretheses are percentage of GDP 42.5 (36.6) (46.8) 60.4 (38.9) (43.0) 55.9 (42.8) (42.8) 58.9 (44.9) (52.0) (%) -20 Japan United States United Kingdom Germany Sweden France (FY2013) (FY2010) (FY2010) (FY2010) (FY2010) (FY2010) (Note) 1. Japan: FY2013 projection, Other countries: CY2010 actual. 2. The ratio of fiscal balance to NI for Japan and the U.S. is calculated on a basis where the social security funds are excluded, while the ratio for other countries is based on the general government. (Source) OECD "National Accounts", "Revenue Statistics", etc. International Comparison of National Burden Ratio (as a percentage of GDP) Social Security Contribution Tax Burden Ratio (Sources)Japan : "SNA(National Accounts of Japan)"(Cabinet Office, Government of Japan) Other Countries:"National Accounts"(OECD),"Revenue Statistics "(OECD) 45

49 MEMO 46

50 19. Special Accounts Japan s public finance account consists of the General Account, under which general expenditure of the government is covered by tax and other revenues, and Special Accounts, which are set up to carry out specific operations using specific revenues (insurance contributions, etc.). Special Accounts are established with the aim of clearly indicating the relationship between benefit and burden, as well as the revenue and expenditure of each operating entity. Ex. Pension payments General tax revenues, etc. Pension premiums Single account Accounting of general administrative activities + Accounting of pensions General expenditures Pension payments If accounted for separately Accounting of pensions Government share General account Accounting of general administrative activities Special Accounts Accounting of pensions Defense expenditures, education expenses, etc. The relationships between benefits and burdens with regard to pensions are not clear because general tax revenues, pension premiums, general expenditures and pension payments are accounted for together. Pension reserves pension reserve Pension payment Special Account List Special Account for Local Allocation Tax and Local Transfer Tax (Cabinet Office, Ministry of Internal Affairs and Communications, Ministry of Finance) Special Account for Earthquake Reinsurance (Ministry of Finance) Special Account for Government Bonds Consolidation Funds (Ministry of Finance) Special Account for Foreign Exchange Funds (Ministry of Finance) Special Account for Fiscal Investment and Loan Program Funds (Ministry of Finance, Ministry of Land, Infrastructure, Transport and Tourism) Special Account for Measures for Energy (Ministry of Education, Culture, Sports, Science and Technology, Ministry of Economy, Trade and Industry, Ministry of the Environment) Special Account for Labor Insurance (Ministry of Health, Labour and Welfare) Special Account for Pension (Ministry of Health, Labour and Welfare) Special Account for Food Supply (Ministry of Agriculture, Forestry and Fisheries) Special Account for Agricultural Mutual Aid Reinsurance (Ministry of Agriculture, Forestry and Fisheries) 47 Special Account for Forest Insurance (Ministry of Agriculture, Forestry and Fisheries) Special Account for National Forest Service (Ministry of Agriculture, Forestry and Fisheries) Special Account for Fishing Boat Reinsurance and Fishermen s Mutual Aid Insurance (Ministry of Agriculture, Forestry and Fisheries) Special Account for Trade Reinsurance (Ministry of Economy, Trade and Industry) Special Account for Patent Registration (Ministry of Economy, Trade and Industry) Special Account for Social Infrastructures Improvement (Ministry of Land, Infrastructure, Transport and Tourism) Special Account for Motor Vehicle Safety (Ministry of Land, Infrastructure, Transport and Tourism) Special Account for Reconstruction from the Great East Japan Earthquake* (The Diet, Court of Justice, Board of Audit, Cabinet, Cabinet Office, Reconstruction Agency, Ministry of Internal Affairs and Communications, Ministry of Justice, Ministry of Foreign Affairs, Ministry of Finance, Ministry of Education, Culture, Sports, Science and Technology, Ministry of Health, Labour and Welfare, Ministry of Agriculture, Forestry and Fisheries, Ministry of Economy, Trade and Industry, Ministry of Land, Infrastructure, Transport and Tourism, Ministry of the Environment, and Ministry of Defense) * Established in FY2012

51 48 Expenditures of Special Accounts (Flow) The total expenditures of Special Accounts are trillion yen. The net expenditure of these accounts is trillion yen after deducting transfer of funds among these accounts. Most of the net expenditures comprise government bond repayment costs, social security payments, grant of local allocation tax, and transfer to the Fiscal Loan Funds (fund-raising via fiscal investment and loan bonds, etc.) trillion yen if these are excluded. 8.2 trillion yen if the expenditures (3.8 trillion yen) for the reconstruction from the Great East Japan Earthquake, which is a special factor, are further excluded. (down 0.2 trillion yen from the previous year) The figure in parentheses is FY2012 initial budget. Total Expenditure of Special Accounts : trillion( trillion) 55.0 trillion yen is transferred from the General Accounts (22.2 trillion yen to the Special Account for Government Bonds Consolidation Funds, 16.4 trillion yen to the Special Account for Local Allocation and Local Transfer Tax, and 11.8 trillion yen to the Special Account for Pension) Net Amount: trillion ( trillion) Transfer in and out among accounts 89.1trillion (91.3) Refunding of JGBs trillion (112.3) Transfer to Fiscal Loan Program Fund 11.6 trillion Local Allocatio n Tax Grants, etc trillion Social Security Benefits (Note) 57.8 trillion (58.3) Redemption of the national debt 84.0 trillion (85.0) 8.2 trillion (15.6) (20.0) Expenditures needed for the redemption of government bonds and interest payments Expenditures for pension benefits, health insurance benefits and other social security benefits payable in accordance with applicable laws Measures for local government finances (including the special delivery tax for earthquake disaster reconstruction: 0.6 trillion yen (0.5 trillion yen)) The transfer of funds raised by issuing fiscal investment and loan bonds as resources for Fiscal Loan Funds Reconstruction expenditures: 3.8 trillion yen (3.2 trillion yen) Surpluses in Special Accounts (Flow = difference between revenues and expenditures at the time of account settlement) Account Settlement Surpluses, which means difference between revenues and expenditures in each Special Account, are 13.1 trillion yen in FY2012 (excluding the Special Account for Government Bonds Consolidation Fund). These surpluses are transferred to 1) reserves (3.8 trillion yen), 2) revenues in the next fiscal year s Special Accounts (7.2 trillion yen), 3) the General Account (2.0 trillion yen). Surpluses which are able to be transferred to the General Account are utilized the fullest extent. Disposition of surpluses in main Special Accounts (FY2012 Settlement) pension Special Accounts (Account) Surpluses Major Factor Major Method of Disposition Basic Pension 2.7trillion Pension benefits were lower than projections. National Pension Employee s Pension 0.4trillion Pension benefits were lower than projections. 1.1 trillion: Transferred to FY2013 Special Account revenues to cover pension benefits in FY2013 and following years. 1.6 trillion: Transferred to reserves to cover pension benefits in FY2013 and following years. Transferred to reserves to cover pension benefits in FY2013 and following years. Health 0.3trillion Insurance revenues were higher than projections. Transferred to FY2013 Special Account revenues to cover Contribution benefits in FY2013 and following years. Foreign Exchange Funds Reconstruction from the Great East Japan Earthquake 2.9trillion 1.9trillion Asset management earnings (difference in interest rates between foreign currency-denominated asset holdings and yen-denominated liabilities (Financing Bills)) Businesses were transferred from previous fiscal year by delaying due to the difficulty of local negotiacion 1.9 trillion: Transferred to FY2013 General Account 0.9 trillion: Transferred to FY2013 Special Account revenues Transferred to FY2013 Special Account revenues to budget for reconstruction businesses transferred to FY2013 Local Allocation and Local Transfer Tax 1.4trillion Remaining amount of Local Allocation Tax Grant was transferred to the next fiscal year. Transferred to the FY2013 Special Account revenues to cover the Local Allocation Tax Grants, etc. in FY2013. FILP (Fiscal Loan Program Fund) 0.7trillion Asset management earnings (the Fund has been raised at lower rates while long-term loans made in the past at higher rates still continue to be held) Reserve for losses due to interest rate fluctuations 0.7 trillion yen in the surplus reserve (0.8 trillion yen) was transferred to the FY2013 General Account under the Special Measures Act. Government Debt Consolidation Fund 1 Basic balance: 11.4 trillion yen (systematically saved for government bond repayment in future. The expenditure right is granted in anticipation of unforeseen circumstances). 2 Issue of advance bonds: 10.5 trillion yen (refunding bonds issued for government bond repayment for the following year, etc.)

52 Accumulated fund of special accounts, etc. (stock) (As of FY2012 settlement) The reserve funds of special accounts amount to approximately trillion as of the settlement of FY2012. However, approximately 80% of this total is related to insurance services, such as national pension, and is reserved to cover benefit payments in the future. Of which Pension trillion (National Pension 7.3 trillion) (Welfare Pension trillion) Labor Insurance 14.2 trillion (Industrial Injury 7.8 trillion) (Employment 6.3 trillion) etc. Special Account for Government Bonds Consolidation Fund: 10.5 trillion (for preparing for future government bond redemption) In FY 2013, by taking advantage of the fund balance, planning to use 3 trillion for government bond redemption. (for preparing for future government bond redemption) Other 0.2 trillion Special Account for Measures for Energy 0.1 trillion Special Account for Food Supply 0.2 trillion Insurance Services, such as National Pension: trillion (preparing for future payments) Total trillion Special Account for Fiscal Investment Loan Program: 0.8 trillion 0.1 trillion (Provision for loss due to interest-rate fluctuations) - Based on the Reconstruction Resources Assurance Act, 0.7 trillion yen is transferred to the Special Account of the Government Debt Consolidation Fund (allocated to the reconstruction bond repayment) - Expected balance of the accumulated fund as of the end of FY2013 (balance as of the end of FY2012: 0.1 trillion yen + Surplus newly generated in 2012: 0.7 trillion yen - Amount transferred to the Special Account of the Government Debt Consolidation Fund: 0.7 trillion yen) About the reform of special accounts Special Account for Foreign Exchange Funds: 22.0 trillion (for preparing for financing possible financial loss resulting from fluctuations of foreign exchange rates or interest rates) If the exchange rate is 1 U.S. dollar = 89 yen (the end of March 2013), translation losses will be 27.4 trillion yen, remarkably exceeding the reserve. Administrative Reform Council, Summary of special account reform (June 5, 2013) Reforms based on the Special Accounts Act (established in 2007), including streamlining the accounts, utilization of the surplus, and review of expenditures, have steadily made progress. In line with the purpose of the system, in order to further streamline national finances and increase transparency thereof, accounts must be trimmed down. Moreover, wasteful expenditures associated with existence of specific revenue shall be eliminated on an ongoing basis. Legal reform shall be promptly initiated, starting with the most implementable reforms so as to ensure proper implementation from FY2014. Reforms shall be realized in line with the four policies below. 1 Verification of the need for the central government to conduct the project 2 Verification of the need for segmented accounting 3 Optimization of accounting segmentation 4 Utilization of surplus, etc. Abolishment of special accounts (account)/transfer to organizations other than the central government, etc. [Trade reinsurance] [Automobile safety (account for automobile inspection/registration)] [Forest insurance] Abolishment of special accounts (account) [Project for social capital improvement [ Airport improvement shall be included in deferred and accrued accounts.]] [Stable food supply (account to enhance agricultural business infrastructure)] [Distribution of allocation tax and transfer tax (account for special subsidy for traffic safety measures)] Integration of special accounts (account) [Stable food supply+agricultural reinsurance+fishing boat reinsurance and fishery mutual aid insurance] [Pension (National pension account+welfare pension account)] Review of the reserve fund system [In order to use the surplus, etc. of a special account for foreign exchange funds to reimburse financing bills] Optimized calculation of surplus [Income from the issuance of front-loaded bonds in the special account of the Government Debt Consolidation Fund shall be included in the next fiscal year s revenue.] 49

53 MEMO 50

54 20. Net total for each major expenditure in general and special account The net total for major expenditures represents the net sum (i.e. the sum of the General Account total expenditures (FY2013: 92.6 trillion) and the Special Account total expenditures (FY2013: trillion) less transferring in and out among accounts) sorted for each policy field. In other words, it refers to the overall picture of the central government s expenditures. Fiscal Resources for loans provided by the central government (Unit: trillion yen) * Others Fiscal Investment Loan Program Bonds 12.2 Local Allocation Tax Grants, etc Others * 30.8 Total trillion National Debt Service 83.7 Social Security 76.4 Public works 6.9 trillion Education & Science 5.5 trillion National defense 4.8 trillion Food supply 1.9 trillion Energy 1.3 trillion Economic Assistance 0.5 trillion Former Military Personnel Pensions 0.5 trillion Promotion of SMEs 0.3 trillion Miscellaneous 7.5 trillion Contingency Reserve for acceleration of reconstruction & revitalization of Fukushima 0.9 trillion General Contingency Reserve 1.1 trillion Fiscal resources to maintain government service for local government that have limited revenue Interest payments and repayment of national debt Pension, Medical Care, Long-term Care, Unemployment benefits, Public Assistance, etc. (Note) FY2013 initial budget basis. Trends in the net expenditure budget of the General Account and the Special Accounts (Unit: trillion yen) Item Total Expenditure of the General Account (A) Total Expenditure of the Special Account (B) FY2011 Settlement FY2012 Settlement (prospected) FY2013 Initial Budget Total (C = A + B) of which, the amount overlapped (D) Difference (E = C D) of which, the amount deducted (F) Net Total (= E F) (Note) The amount deducted refers to refinance redemption amount in the Special Account for Government Bonds Consolidation Funds. 51

55 21. Thorough Improvement of Budget Efficiency 52 The government thoroughly improves budget efficiency through enhancing the PDCA cycle for evaluating how budget funds are spent as well as what kind of results the budget has yielded, and then making use of evaluation results for future budgetary planning process. Reflection of the resolutions of the Diet, the reports on inspection of the settlement of accounts, etc. With regard to the resolutions concerning the settlement, adopted by the Diet, they are accurately reflected in the budgets. <Example> Review of reflecting the overcharge by Mitsubishi Electric Corporation, etc. [Amount reflected: -4.7 billion yen] As pointed out by the Board of Audit, each administrative task and project are rechecked as to their necessity and efficiency. <Example> Revision of government investment in Japan Agriculture, Forestry and Fisheries Credit Foundation. [Amount reflected: 12.4 billion yen] [Amount reflected in the budget for FY2013: 79.9 billion yen] As for the projects, etc. generating a large amount of wastage, the details of each budget will be strictly revised according to the settlement results. <Example> Appropriate reflection of the execution of subsidies for measures to stabilize business income. [Amount reflected: billion yen] Reflecting the results of budget execution survey The budget execution survey is conducted by officials of the Budget Bureau of the Ministry of Finance, or those of Local Financial Bureaus, who regularly attend and witness the execution of budgets. They conduct the survey of such activities, point out the matters to be improved, and eventually revise the budgets and rationalize their budget execution. For FY2012, the budget execution survey was conducted on 75 occasions, while promoting the improvement of survey quality by using knowledge on external key figures, etc. The necessity, effectiveness and efficiency of projects, etc., were reviewed, and the findings are reflected in the budgets for FY2013 by abolishing all or some of them. <Example> Cost shall be reduced by such measures as abolishing some training for the Senior Work Program Project (Ministry of Health, Labour and Welfare) because it does not directly promote the employment of senior citizens, which is the purpose of the project. [Amount reflected: 540 million yen] [Amount reflected in the budgets for FY2013: 17.2 billion yen] Utilization of policy evaluation The results of policy evaluation are utilized in budget formulation in accordance with the Government Policy Evaluation Act. <Example> Regarding the stipulation, Enhance the function of public job stabilization organizations, etc. to adjust supply and demand, and secure optimal management of the worker dispatch business, necessary expenses shall be evaluated by reviewing the number of vocational counselors, etc. based on policy evaluation that requests efficient business operation. [Amount used: 550 million yen] [Amount used for the budget for FY2013: 11.4 billion yen] Plan (Planning the budget) Action (incorporating the evaluation results) Do (Executing the budget) Check (Evaluating and verifying the budget) - Budget execution survey - Audit reports - Policy evaluation, etc.

56 Reference Trend in Fiscal Condition Recession Bond dependency ratio (ratio of bond issues to total expenditures) Nominal GDP growth (68SNA for FY , 93SNA for FY ) (Actual results for FY , projection for FY2012 and FY2013) (trillion yen) Tax revenue Settlement minus Initial Budget New goals for medium-term fiscal management Dependence on special deficit-financing bond issues ended Introduction of consumption tax Utilization of proceeds from NTT share sales Promotion of fiscal reform Minus ceiling Goal set to end dependence on bond issues in 1990 Zero ceiling Global recession First step toward fiscal reconstruction Goal set to end dependence on bond issues in 1984 Second oil crisis Locomotive theory Active fiscal policy for 7% growth at Bonn Summit Active fiscal policy backed by a current account surplus Goal set to dependence on bond issues in 1980 Supplementary budget to launch special deficit-financing bonds 2 trillion yen in tax cuts First oil crisis First year of high-level social welfare Nixon Shock (August) Efforts to reduce bond dependency with tax revenue rise resulting from high economic growth Introduction of construction bonds FY1965 supplementary budget to issue revenue-covering bonds 53

57 54 Construction bond Special deficit-financing bond (Actual result for FY , Initial budget draft for FY2013) 51.5% 49.5trillion 49.2% 52.0trillion 44.4% 42.5% 46.3% 39.2% Bond issues (trillion yen) trillion 42.8trillion 42.3trillion trillion (FY) (FY) In the initial budget, tax revenues exceeded the amount of government bonds issued for the first time in these four years. Urgent Economic Countermeasures for the Revival of the Japanese Economy are announced trillion yen government bond issuance planned in the initial budget Emergency Economic Countermeasures for Future Growth and Security are announced. Economic crisis countermeasures are announced. A set of three economic measures totaling 75 trillion yen is announced. New government bond issuance reduced by 4.5 trillion, hitting record-high reduction of government bond issuance trillion yen government bond issuance planned in the initial budget 30 trillion yen government bond issuance planned in the initial budget Permanent national and local tax cuts worth more than 6 trillion yen Suspension of the Fiscal Structure Reform Act 4 trillion yen in special tax cuts Consumption tax rate hike Enactment of the Fiscal Structure Reform Act 6 trillion yen in income and other tax cuts Special deficit-financing bond issues resumed (Accumulation of government bonds ended)

58 55 Discussion 1. Social Security (1) Medical Care Against the backdrop of increase of medical expenses in excess of the economic growth mainly due to the aging of the population and the sophistication of medical technologies, it is necessary to realize more appropriate and fairer allocation and sharing of benefits (medical service provisions) and burdens (insurance fees, etc.) by thoroughly rationalizing medical costs in order to reinforce the sustainability of the public medical insurance system in future. 1) Breakdown of National Health Care Expenditures ( 37.4 trillion in FY2010) - Age groups -> Those aged 65 or older (approx. 20% of the population) spend approx. 60%, and those aged 75 or older (approx. 10% of the population) spend approx. 30%. National health care expenditures (37.4) Citizens younger than 65 years old: 45% (16.7) Citizens aged 65 or older: 55% (20.7) [70 or older: 45% (16.9); 75 or older: 33% (12.5)] Revenue source analysis: Patients are paying 13% of overall expenditures while the remaining 87% are financed with the public funds, such as taxes and insurance fees Public funds (taxes) :38% (14.3) [Central government: 26% (9.7) ; Local Governments: 12% (4.6)] Insurance fees: 49% (18.1) [Business owner: 20% (7.5); Persons insured: 28% (10.6)] Patient charges: 13% (5.0) Expenditures structure: Personnel costs for doctors etc.: approx. 50%; Drugs and medicines: approx. 20%; and others: approx. 30% Personnel costs for doctors, etc.: 48% (17.8) Drugs and medicines 22% (8.3) Healthcare materials: 6% (2.3) Commission expenses, Utility charges: 24% (9.0) (Note) The Figures represent the FY2010 data. (The figures in parentheses represent the data in 1 trillion.) 2) Medical Care Gap with Foreign Countries. Japan shows significant gaps compared with other countries, particularly in terms of medical care expenditures for elderly citizens. Medical expenditures per late-stage elderly citizen stands at a significantly higher level than those for younger generations: Approx. 5 times as large as medical expenditures for younger generations in Japan, while 3 to 4 times in foreign countries. The number of hospital beds are more and the number of days in hospitals are longer than foreign countries: Number of hospital beds: 2 to 5 times as large as foreign countries level; number of days in the hospital: 3 to 5 times as long as foreign countries level. Japanese citizens visit hospitals more frequently: The highest level among OECD member countries; 2 to 5 times as frequent as foreign countries level. In Japan, use of generic drugs is still very limited. Share of generic drugs (Volume, FY2010) Japan About 40% U.S. About 90% U.K. About 70% Germany About 80% France About 60% (Source) Special Committee for the price of medicine, Central Social Insurance Medical Councill (October 31, 2012)

59 3) Provision of medical services The majority of hospitals currently calculate medical service payment based on the basic fee covering a nurse for every seven patients, which is the highest to deal with acute phases. Therefore, the medical service system must be changed by [The current status (FY2010) ] [The desirable status (FY2025) ] 7:1 328,518 (15,660 yen/day) Acute Phase (180,000) normal beds 10:1 (13,110 yen/day) 13:1 (11,030 yen/day) 15:1 (9,450 yen/day) long-term beds 248,606 33,668 66, ,462 Sub-Acute Phase (350,000) Post-Acute Phase (260,000) Long-term Treatment (280,000) Region-Based hospital beds (240,000) Survey conducted by the Medical Economics Division, Health Insurance Bureau, Ministry of Health, Labour and Welfare (Source) Central Social Insurance Medical Council data (November 25, 2011) [The number of sickbeds per capita] The total number of sickbeds (per 100 thousand people) 1315±502 Regarding this reform, the number of sick beds per population is low in the Kanto, Koshinetsu, and Tokai regions, and high in Hokkaido, northern Tohoku, Hokuriku, Chugoku, Shikoku, and Kyushu. As a situation is different among those regions, it is necessary to consider that each region needs to establish a different system for medical service provision in accordance with their specific needs. large rather large average rather small small (Source) Prof. Tai TAKAHASHI submitted data to National Council on Social Security System Reform (April 19, 2013) (Total number of beds)= (General beds)+ (Long-term care beds)+ (Mental beds)+ (Tuberculosis beds)+ (Infection disease beds) Calculated by the list of medical care facility providing insured services (Regional Bureaus of Health and Welfare (October 2013)) 4) Cooperation between medical and long-term care To reform a system for medical service provision, both medical service and nursing care should be reviewed comprehensively. In order to support the lives of patients, etc. in their familiar communities with in-home care, etc., and to establish a seamless and comprehensive network among medical service, nursing care, prevention, life support and residents in each region, a system to provide comprehensive regional care must be established. The outline of the Comprehensive Regional Care Systems In the case of a disease Medical system In the case of a need of Long-term care Long-term care system Hospitals for acute phase Hospitals offering the rehabilitation service for post-acute phase and recovery phase Daily medical service: family doctors Hospitals in regional area cooperating with other hospitals Comprehensive Regional Support Centers Care manager They will talk over and coordinate care systems. Going to hospitals or hospitalization Going and entering to facilities House A person with dementia House House for elderly people with care service To live always cheerfully Life support and care prevention Home service: Home-Visit Long-Term Care Home-Visit Nursing Outpatient Day Long-Term Care Multifunctional Preventive Long-Term Care in a Small Group Home Short-Term Admission for Daily Life Long-Term Care Visiting service 24 hours a day Composite service (Multifunctional Preventive Long-Term Care in a Small Group Home and Home-Visit Nursing) etc. Preventive Service of Long-Term Care *The Comprehensive Regional Care Systems are assumed to work in daily activity area where demanded service will be supplied in about 30 minutes (junior high school district). Facility service and residence service Facility Service for Long-Term Care Covered by Public Aid Long-Term Care Health Facilities Communal Daily Long-Term Care for a Dementia Patient Daily Life Long-Term Care Admitted to a Specified Facility etc. Activities by old-people's club, resident's association, volunteer and NPO etc. 56

60 (2) Long-Term Care Long-term care benefit is expected to continue growing, surpassing the nation s economic growth. In order to enhance sustainability in the aging society, long-term care service must be streamlined and prioritized by optimizing insurance coverage, etc. Increase in total cost (the figures in parentheses are benefit) 3.6 (3.2) trillion 4.6 (4.1) trillion 5.2 (4.7) trillion 5.7 (5.1) trillion 6.2 (5.6) trillion 6.4 (5.8) trillion 6.4 (5.9) trillion 6.7 (6.2) trillion 6.9 (6.4) trillion 7.4 (6.9) trillion 7.8 (7.3) trillion 8.2 (7.6) trillion 8.9 (8.3) trillion 9.4 (8.7) trillion FY2000 FY2001 FY2002 FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 (note) FY2000-FY2011 : actual, FY2012,2013 : initial budget basis Trend of primary insurance fee (weighted average) FY2013 FY2000-FY2002 FY FY FY FY ,911 3,293 4,090 4,160 4,972 More specifically, the fees paid by users of long-term care insurance (currently the same fees regardless of income level) shall be reviewed for a possible raise according to income level. Special elderly nursing homes shall also be reviewed to prioritize users with moderate or severe disabilities, etc. Revision of burden for users of care service Paying 20% of Long-Term care expenses Paying 30% of Long-Term care expenses Medical Insurance (Elderly people earning as well as working population) Paying 10% of Long-Term care expenses Long-Term Care Insurance The proportion of patients requiring intensive nursing care in special elderly nursing homes is increasing year by year, while patients requiring moderate nursing care accounted for 11.8% in 2011 (where there are levels 1 and 2 for needing care). A certain ratio of moderate patients uses nursing homes. Care Level 1 Care Level 2 Care Level 3 Care Level 4 Care Level 5 (Average caring degree) (3.35) (3.63) (3.75) (3.86) (3.89) (Reference) People admitted into Intensive Care Homes for the Elderly in 2011 (About 140 thousand people) (About 4 thousand people) (About 12 thousand people) (Source) Survey of Institutions and Establishments for Long-term Care (About 36 thousand people) (About 51 thousand people) (About 35 thousand people) (Source) Health and Welfare Bureau for the Elderly, Ministry of Health, Labour and Welfare 57

61 (3) Pensions Under the 2004 revision, in light of a rapidly aging society with a declining birthrate, a framework for new pension finances has been established so as to ensure a sustainable pension system in the future. The mechanism for stability of the current pension program (Revised in 2004) With the aim of establishing a mechanism which automatically responds to changes in the population structure and economic situation The government s financial contribution (50%) to basic state pensions * Perpetuated by assuring stable revenue sources through fundamental reform of the tax system Use of reserve funds Increase of insurance rate by fixing the upper limit (1) Revision of pension amount in accordance with the increase in price, etc. ( To respond to the impact on pension financing due to the economic trend) (2) Adjustment of pension amount by microeconomic slides ( To respond to the impact on pension financing due to the falling birth rate and the aging population) * As the lower limit of the pension benefit level, an income replacement rate of 50% is assured for households receiving standard pension benefits. Insurance revenues Reserve funds State Contributions (Tax revenues) Pension benefits In the 2012 comprehensive reform on social security and taxes, four Acts regarding pensions were enacted to introduce a permanent raise in the ratio of government contribution to basic pensions to 50%, and abolish the pension special standard, etc. The framework of pension finances to balance long-term benefits and contributions (introduced by the 2004 revision) has been completed. Efforts to enhance the safety net have also been initiated. Act for Partial Revision of the National Pension Act, etc. in order to strengthen the Financial Ground and Minimum Guarantee Function of the Public Pension System Making permanent fix of the share of government contribution to the basic pension funds to 50%* April 2014~ Shortening the period of validity (25 years 10 years)* October 2015~ Exemption of a person in the second grade by the national pension plan from paying in to a social health insurance during maternity leave April 2014~ Expanding the application of Survivor s Welfare Pension for motherless family* April 2014~ Expanding the application of Employees Pension for Part-Time Workers October 2016~ Act for Partial Revision of the National Pension Act, etc. in order to maintain the 50 percent share of the government contribution to the Basic Pension Benefit in 2012 and 2013 etc. Securing the share of government contribution to the basic pension funds to 50% by Pension-related Special Deficit-Financing bonds in FY2012 and FY2013 Dissolution of special level of pension benefit The special level of pension benefit will decreased 1.0% (October 2013~), additionally 1.0%(April 2014~), additionally 0.5% (April 2015~) Act on the payment of Supplementing Allowance for Pensioners Welfare benefit for elderly people with low income and disabled people* October 2015~ Act for Partial Revision of the Employees' Pension Insurance Act, etc. for unifying employees' pension insurance systems Unification Employees Pension and Mutual Aid Pension October 2015~ *Those measures will be implemeneted matching it with carrying out of Act for the Fundamental Reform of the Tax System. 58

62 (4) Decline in Birthrate According to recent data, 1.04 million babies were born for a special birthrate of 1.41, thus showing a slightly higher tendency relative to 1.26 achieved in 2005, but which still does not allow for optimism. The number of children on nursery waiting list has decreased for two consecutive years, but still exceeds 20,000. Among them, the youngest children (0-2 years of age) account for approx. 81.4% (20,207) of all children on nursery waiting list. The transition of the births and the total fertility rate (unit: thousand people) Births st baby boom (1947~1949) The highest births 2.7 million people Hinoeuma (1966) 1.36 million people nd baby boom (1971~1974) 2.09 million people 2.14 Births 1.57 shock (1989) 1.25 million people (Source) MHLW, Vital Statistics The transition of the number of children awaiting places and the capacity of nursery 1.57 Total Fertility Rates (2012) The lowest births 1.04 million people (2005) The lowest Total Fertility Rates Total Fertility Rates Urgent intensity measures period Supporting Package ~5 pillars~ (Source) MHLW The government shall develop a plan to accelerate the resolution of such waiting children, intensively improve child care for approx. 200,000 children in the period of urgent intensive efforts for the two years of 2013 and 2014, and ensure child care for approx. 400,000 children by the end of FY2017, so as to cover the potential need for child care. Plan to Accelerate Elimination of Children Wait-listed for Childcare Services Peak of childcare demand FY2013 FY2015 FY2017 FY million 20 million children children Urgent Project *exploring financial resources Securing financial resource by VAT Urgent Project Accelerating measures period Measures under the new system Front loading 2 years Aiming to eliminate the waitlisted children New system starts The period of the project of regional support for child and childcare(fy2015~2019) Local public entities Providing childcare centers by utilizing leased property and state-owned land Securing childcare-workers who support the increased amount of childcare Front loading of the new systems (the small-scale childcare service, etc) Support to nursery without authorization which aims at getting authorized Support to the childcare service centers at office 59

63 (5) Review of the public assistance system Expenses for the public assistance system account for 3.8 trillion yen (including the national expense of 2.8 trillion yen) in the FY2013 budget. Expenses of benefits for livelihood assistance, medical assistance, and housing assistance account for large proportions. Regarding the expenses for livelihood assistance and medical assistance, the benefits shall be optimized as follows: [Adjustment of the level of the livelihood assistance] Adjustment of the level of the livelihood assistance benefits - Based on professional verification results, it shall be adjusted to the impact of age, the number of family members, and regional disparity. - The trend in commodity prices since the previous review (2008) shall be taken into consideration. - Benefits shall be optimized in a stepwise manner in about three years from August 2013 to the end of FY2015. Reviewing the year-end temporary aid - Currently, the benefits multiplied by the number of family members are paid in a uniform manner. The amount of benefits shall be reviewed in consideration of economic efficiency (scale merit). [Adjustment of the medical assistance] Obligation the use of generic medicines as a principal rule For medical institution For pharmacy - The Public Assistance Act shall be revised to stipulate the duty of making efforts to promote generic drugs for public assistance recipients whom physicians approve the use of generic drugs. - A clerical notice shall be issued to dispense generic drugs, in principle, for public assistance recipients whom physicians approve the use of generic drugs. For pensioner of the livelihood assistance - A clerical notice shall be issued for use of generic drugs, in principle. - For public assistance recipients who want to use original drugs, their names and reasons shall be reported to the welfare office. They shall be subject to instruction on the use of drugs by welfare offices, in principle. Government burden for public assistance (based on expenses) 4, , , , , , , Livelihood Assistance Medical Assistance 3, , ,514.8 Housing Assistance Other Assistance 3, national expenditure 3, , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,209.0 (unit: trillion yen) (note) FY2000~FY2011: settlement, FY2012: supplementary budget, FY2013: initial budget. (FY) Through these reviews, the criteria for livelihood assistance shall be optimized to a certain degree. However, further review is required for the following: [1] Assistance system other than the livelihood assistance [2] Fundamental, ideal addition systems for the livelihood assistance, etc. Basic Policies for Economic and Fiscal Management and Reform (Decision by the Cabinet on June 14,2013) (Public assistance and support for the needy) Forms of aid (i.e., system for addition and levels of various assistance benefits) will be studied and reviewed swiftly. Inappropriate or inefficient benefits will be corrected. 60

64 Discussion 2. Education, Science and Technology (1) Education Since 1989, expenditure by the central and local government on public education per child has increased by 60%. Since 1989, the number of children attending public elementary and junior high schools has decreased by 30% due to the low birthrate, while expenditure on public education (public elementary and junior high schools) per child has increased by 60% because this total amount of expenditure has been kept almost at the same level. (trillion yen) 12.0 Public education expenses (of the education expenses, those disbursed by the government and municipalities ) (10 thousand students) 1, million students trillion yen Increase of 6% 1, trillion yen 905 thousand yen Increase of 56% thousand yen Number of children attending schools Public education expenses disbursed for each million students Decrease of 32% ,200 1,000 (FY) (Source) Basic Research on Schools and Research on Local Education Expenses The percentage of educational expenditure covered by the central and local governments per child is maintained at a level comparable with that in other advanced countries. The ratio of educational expenditure borne by the central and local governments in Japan to GDP is about 70% as compared with the same ratio in other advanced countries. On the other hand, since the ratio of the number of children to the total population is also about 70%, Japan s educational expenditure per child is considered to be at a level comparable to that in other advanced countries. The ratio of public expenditure on education facilities (2009) (at all levels of education from kindergarten to graduate school) (%) 8 G5 Average:4.9% 7 6 OECD Average:5.4% (%) France U.K. U.S. Germany Japan 70% Public expenditure on education per child / per capita GDP (2009) Number of pupils / students attending all educational facilities from kindergarten to graduate school / total population (2009) (%) 30 G5 Average:19.5% 25 OECD Average:21.3% OECD Average:25.2% France U.K. U.S. Germany Japan G5 Average:25.0% 70% France U.K. U.S. Germany Japan 61 (Source) OECD Education at a Glance 2012

65 62 The number of pupils / students per teacher stands at almost the same level as the major advanced countries. While the number of children attending public elementary and junior high schools has dropped by 30% with decline in birth rate, there has been no significant change in the number of teachers. Consequently, the number of pupils / students per teacher has fallen to a level comparable to other major advanced countries. (10 thousand people) ( 万人 ) Trends in the number of pupils / students per teacher The number of pupils / students per teacher (2010) 716 thousand ,880 thousand Number of teachers (Public elementary and junior high school) The number of pupils / students per teacher 649 thousand -9% % 2,200 2,000 1,800 1,600 1,400 (people) Elem entary sc hool Junior high school Number of pupils / students 991 thousand -33% (FY) 1,200 1, France U.K. U.S. Germany Japan G5 Average (Source) School Basic Survey (Source) OECD Education at a Glance 2012 (2) Science and Technology To maximize the outcome of science and technology-related investments, it is necessary to selectively allocate budget funds to high-priority projects. In the recent severe financial conditions, for science and technology, budget has been secured to promote the advancement of science and technology (i.e. sustainable research and development for the future, measures to address important tasks, basic research, human resource development). Comparison of science and technology expenditures with general expenditures General expenditure Science and Technology expenditure Social Security expenditure (FY) (Note) Trends in outlays for promoting science and technology, and general expenditures, shown by assuming the values as of FY1989 to be 100. The research environment is reformed so as to secure human resources to support research. Budget adjustments are made so as to use research funding across several fiscal years. The subsidy for scientific research is also reformed to provide continuous and steady support for studies on ips cells, etc. by utilizing the operation grants for research and development corporations.

66 63 Discussion 3. Central and Local Government Tax revenue resources have been properly distributed over local governments through local tax grants and finance transfer based on local tax transfer, in accordance with the division of roles of the central and local governments (net expenditure proportions) Distribution of tax revenue resources of the central and local governments, and expenditure proportions Revenue (FY2013 Initial budget) (Note) Local tax revenues include estimated amount of fiscal plan of local governments and excess taxation and non-law tax and local transfer tax of special corporation surtax. (Central government) (Local governments) National tax revenues Local tax revenues 55.4% 44.6% ( 45.1 trillion) ( 36.3 trillion) Total taxes : 79.4 trillion National :Regional 55: % ( 33.6 trillion) 58.7% ( 47.7 trillion) 41:59 Expenditure (FY2011 Settlement) National annual expenditure (net budget) (note1) 41.6% ( 68.5 trillion) Local allocation tax (corresponding legal ratio) and local transfer tax 11.4 trillion Regional annual expenditure (net budget) 58.4% ( 96.2 trillion) National expenditure : 42:58 Regional expenditure Fiscal transfer 37.3 trillion (note2) Total expenditure : trillion (Note 1) The total national expenditures consist of the general account and 6 special accounts, that is, the special account for tax allocations and transferred tax allocations, the special account for energy measures, the special account for pensions (only the child allowances account), the special account for stable food supply (only the national land improvement project account), the special account for the national forest service (part of the former soil conservation account), and special account for the social capital improvement project as well as the net settlement. (Note 2) The Expenditures from the central government to local governments refer to the total amount of local tax grants, special local tax grants, local transfer tax and national treasury disbursement (including special tax grants for traffic safety and tax grants for the support of municipalities in the improvement and maintenance of the facilities provided by the central government), which are part of the settled local revenues. There are also Expenditures from local governments to the central government (the amounts paid in cash out of the settled local expenditures to the central government in connection with contributions for projects directly controlled by the central government) (0.8 trillion yen). (Source) The situation of public finance of local governments March, 2013 Against the backdrop of not only such financial transfer but also compensation for local financial resources provided by the central government as mentioned on page 14, the central government is facing a severer financial situation than local governments. The rate of debt outstanding and tax revenues of central and local government (FY2013) In other G7 countries, the ratio is 2-5 times for the central government and 1-3 times for local governments. Central government Local governments 23.1 times Approx Approx. 201 Tax revenues (after transfer of local allocation tax grants, etc.) Long-term debt outstanding 4.2 times (Note) Long-term debt outstanding is based on projections for the end of FY2013. Debt in the Special Account for Local Allocation and Local Transfer Tax accounted for by local governments because these debt is borne by these governments.

67 The financial gap between local governments is principally caused by the fact that revenues from local taxes, especially, the two local corporation taxes (corporate enterprise tax and corporate inhabitant tax), are unevenly distributed to major cities including Tokyo. In the case of local consumption tax, such an uneven distribution has been significantly alleviated by adopting the inter-regional adjustment system. The special local corporation tax contributes to alleviating the uneven distribution of revenues from the two local corporation taxes. 1 Hokkaido 2 Aomori 3 Iwate 4 Miyagi 5 Akita 6 Yamagata 7 Hukushima 8 Ibaraki 9 Tochigi 10 Gunma 11 Saitama 12 Chiba 13 Tokyo 14 Kanagawa 15 Niigata 16 Toyama 17 Ishikawa 18 Fukui 19 Yamanashi 20 Nagano 21 Gihu 22 Shizuoka 23 Aichi 24 Mie 25 Shiga 26 Kyoto 27 Osaka 28 Hyogo 29 Nara 30 Wakayama 31 Tottori 32 Shimane 33 Okayama 34 Hiroshima 35 Ymaguchi 36 Tokushima 37 Kagawa 38 Ehime 39 Kochi 40 Hukuoka 41 Saga 42 Nagasaki 43 Kumamoto 44 Oita 45 Miyazaki 46 Kagoshima 47 Okinawa Individual inhabitants tax Index of per capita revenues as local taxes (as settled for FY2011) (by assuming the nationwide average to be 100) Two corporate tax Property tax Local consumption tax (after adjustment) Total local tax Average Highest/Lowest:2.9 times Highest/Lowest:5.3 times Highest/Lowest:2.3 times Highest/Lowest:1.8 times Highest/Lowest:2.5 times 11 settlement 11.1 trillion (13 Local Public Finance Program 11.7 trillion) 11 settlement 4.6 trillion (13 Local Public Finance Program 4.8 trillion) 11 settlement 8.9 trillion (13 Local Public Finance Program 8.6 trillion) 11 settlement 2.6 trillion (13 Local Public Finance Program 2.7 trillion) 11 settlement 35.2 trillion (13 Local Public Finance Program 35.8 trillion) (Note 1) The Local government finance plan for FY2013: 35.8 trillion yen includes the special local transfer corporate tax of 1.8 trillion yen. (Note 2) Individual inhabitant tax revenues refer to the total amount on a per capita basis and per income basis. Also, fixed asset revenues include those of prefectures. (Note 3) The populations refer to those based on the Basic Resident Register as of March 31, (Remarks) Compiled according to the settled values for FY2011 (excluding the over-assessed tax amounts). Index of per capita revenues as taxes generated among municipalities according to mechanical standards, or transferred to each municipality (by assuming the nationwide average to be 100) 1 Hokkaido 2 Aomori 3 Iwate 4 Miyagi 5 Akita 6 Yamagata 7 Hukushima 8 Ibaraki 9 Tochigi 10 Gunma 11 Saitama 12 Chiba 13 Tokyo 14 Kanagawa 15 Niigata 16 Toyama 17 Ishikawa 18 Fukui 19 Yamanashi 20 Nagano 21 Gihu 22 Shizuoka 23 Aichi 24 Mie 25 Shiga 26 Kyoto 27 Osaka 28 Hyogo 29 Nara 30 Wakayama 31 Tottori 32 Shimane 33 Okayama 34 Hiroshima 35 Ymaguchi 36 Tokushima 37 Kagawa 38 Ehime 39 Kochi 40 Hukuoka 41 Saga 42 Nagasaki 43 Kumamoto 44 Oita 45 Miyazaki 46 Kagoshima 47 Okinawa 48 Average Local consumption tax (before adjustment) Local consumption tax (after adjustment) Two corporate taxes Two corporate taxes (after allotment of local corporate transfer tax) (Reference) allotment of local corporate transfer Highest/Lowest:11.8 times Highest/Lowest:1.8 times Highest/Lowest:5.3 times Highest/Lowest:3.9 times Highest/Lowest:1.5 times 11 settlement 2.6 trillion (13 Local Public Finance Program 2.7 trillion) 11 settlement 4.6 trillion (13 Local Public Finance Program 4.8 trillion) Actual 1.5 trillion (Note 1) The two local corporation taxes (after the transfer of special local corporation taxes) refer to the amount calculated by adding special corporation taxes transferred for FY2011 (1.5 trillion yen). (Note 2) The populations refer to those based on the Basic Resident Register as of March 31, (Remarks) Compiled according to the settled values for FY2011 (excluding the over-assessed tax amounts). 64

68 65 While the government has been pushing ahead with streamlining subsidies for local governments, social security-related subsidies have been rising due to the declining birthrate and aging population. In FY2013, social security-related subsidies occupy approximately 70% of the overall subsidies from the central government. Overall picture of subsidies from the central to local governments (FY2013 budget)

69 MEMO 66

70 Discussion 4. Public Works 67 Establishment level of social infrastructures has been improved in Japan. However, as Japan will face with decreasing population in the future, the government needs to selectively allocate budgetary funds to highpriority public works and to further streamline public works. 1) Trends in public works-related expenditures Public works-related expenditures in FY2013 initial budget: billion yen (up billion or 15.6%, on a year-on-year basis) If Local Autonomy Strategy Grants are included in FY2012 budget: billion yen (up 18.2 billion or 0.3%, on a year-on-year basis) (Note) It excludes the transfer to the special account for recovery from the Great East Japan Earthquake (35.6 billion yen) that has been allocated to individual ministries, and the burden of directly-controlled projects (2.9 billion yen) which was calculated as expenditure in the general account when the special account for national forest service was included in the general account. (trillion yen) Initial Budget Supplementary Budget (Note) Excluding NTT-A type. (FY) 2) Trends in the breakdown of public works-related budget (by type of project) FY2003 (Initial Budget) Total billion FY2013 (Initial Budget) Total billion

71 3) Change in socio-economic conditions and progress of social infrastructure improvement Economic growth and population dynamic etc. CY 1990 CY 2011 Change Progress of social infrastructure development FY 1990 FY 2012 Change GDP(Nominal, trillion yen) (+8.8%) Number of dams (+77%) Component rate of GDP by type of economic activity Primary industries(%) Secondary industries(%) Tertiary industries(%) National income per capita (Nominal(FY), thousand yen) Population(thousand people) (-50.0%) (-28.8%) (+18.3%) 2,808 2,729 (-2.8%) 123,61 128,06 (+3.6%) Total road length (Highstandard road)(km) Number of quays at major ports(number of locations) Sewage diffusion rate(%) 62 FY 1997 Developed farming areas (10,000 hectares) 5,281 10,052 (+90%) 7 71 (+914%) 87 FY FY 2009 (+40%) (+19%) 4) Trend of general government fixed capital formation as a percentage of GDP Japan has been taking a sharp downward trend, but still keeps a higher level than Western nations. Japan France U.S. U.K. Germany (Source) Japan: Cabinet Office National Accounts (fiscal year basis) Other countries: OECD National Accounts (OECD Stat Extracts) (calendar year basis), Economic Outlook 70 ( data for Germany) (calendar year basis) (CY/FY) 5) Strict management of project assessment With strict management of project assessment, newly approved projects are narrowed down, some projects are discontinued or under a thorough review. (In FY2013, 14 projects were discontinued and 4 projects are downsized.) Flow of project assessment (a project carried out by the central government) <schematic view> (Approval of new projects) (Start of work) (Completion) Assessment at the planning stage Assessment made when a new project is approved Re-assessment Ex post facto assessment (Projects not started within 3 years) (3 years after re-assessment) (Within 5 years after completion) (Projects continuing for 5 years) 68

72 Discussion 5. National Defense It is important to appropriately respond to changes in the security environment that surrounds Japan, and to rationalize/streamline expenses through cost reduction, etc. Trends in national defense expenditures Breakdown of national defense expenditures There are three types of national defense expenditures: (1) personnel and provisions expenses, (2) obligatory outlay expenses and (3) general material expenses. (1) and (2) occupy approximately 80% of the total, so it is important to put a curb on personnel costs and new contracts that would bring about expost payment. FY2013 Initial Budget (Total 4,753.8 billion yen) General material expenses 1,049.3 (22.1%) Obligatory outlay expenses 1,714.9 (36.1%) Personnel and provisions expenses 1,989.6 (41.8%) (Unit:billion yen) 1) Personnel and provisions expenses Salaries for SDF personnel and food expenses for those living in defense facilities. 2) Obligatory outlay expenses Expenditure on equipment and materials to be dispensed in FY2013 based on contract made in FY2012 and preceding fiscal years. The ex-post payments of contract in FY2013: 1,729.9 billion yen (down billion yen over the previous fiscal year) 3) General material expenses Expenditures on equipment and materials to be dispensed in FY2013 based on contracts signed in FY2013 Efforts for Cost Reduction The costs of building and purchase of new equipment will be reduced through life extension of main equipment (warships and aircraft). Also costs will be reduced by stocking up equipment in a short time. Improvement of FY2013 defense power, etc. (Decision by the Security Council of Japan and a Cabinet meeting held on January 25, 2013) The Improvement of FY2013 defense power indicates following guidelines: Works intensively on the following: information collection, vigilance and surveillance and ensuring safety on areas surrounding Japan; reinforcement of defense for islands and capacity to deal with disasters, and promotes measures to enhance fast-response capacity. Reviews steadily the capacity of the U.S. Forces Japan, in order to reduce the burden on local residents while maintaining deterrence by the U.S. Armed Forces. Promotes more bilateral and multilateral dialogues in order to promote further stabilization of the international security environment, and enhances the foundation of international activities of the Self Defense Forces. Promotes effective utilization of human resources by optimizing the ranks and age composition of officers from the standpoint of enhancing mental strength, and efficient procurement of equipment, etc., with considering severe financial conditions; especially, takes every measure to reduce lifecycle cost, and promotes improvement of transparency in the procurement process and optimization of the contract system. 69

73 Discussion 6 Official Development Assistance Official Development Assistance (ODA) enhances the trust and presence of Japan through cooperation provided toward developing countries. Japan ensures necessary budget and projects in order to deliver strategic ODA with the following pillars: measures against terrorism, etc. to establish a safe, peaceful international environment; measures against poverty, etc. to promote human security; support for development of Japanese business overseas, etc. The achievement of Japan s ODA can be compared favorably with such assistance provided by other major countries. Definition of Official Development Assistance (ODA) ODA consists of bilateral provision of aid (grant aid programs/technical cooperation) for developing countries and government loans (yen-denominated loans), as well as donations for international organizations, etc. More specifically, it includes support for measures against environmental problems, food aid, establishing infrastructure such as roads and bridges, and financial and technical aid provided by the Japanese government and the Japan International Cooperation Agency (JICA), etc. ODA (Official development assistance) Grants aid (construction of schools/ hospitals, relief for natural disaster victims Grants and refugees, assistance to NGO and debt waivers, etc.) Technical cooperation Bilateral (dispatching of Japan Overseas Cooperation Volunteers and accepting trainees, etc.) Government loans (loan aid) (infrastructure development such as road, bridges, power plants, etc.) Contributions to international organizations (UNICEF and WHO, etc.) Scale of ODA projects ODA projects (on a budget base), which comprise the General Account ODA budget as well as yen-denominated loans, contribution bonds for international organizations, and supplementary budget in the preceding fiscal year have increased in 2013 relative to the previous year Grant aid / technical cooperation (General Account, etc.) Contribution to International Organizations Yen-denominated loans 1,851.8 billion billion billion billion ,882.9 billion (+1.7%) billion billion billion (Note 1) As it is calculated at the budget stage and does not include debt relief. Consequently, there may be a discrepancy from the ODA project volume (calendar year) registered in the Development Aid Committee of the OECD. (Note 2) Excluding temporary measures (immediate financial yen loans (FY2011)) in consideration of the Lehman shock. Trends in ODA performance in major countries Taking a look at the ODA achievements of major countries, Japan is ranked second in terms of the gross amount of projects as of 2010, and compares favorably with other major nations. Regarding the net project quantity (gross project quantitygovernment loans paid back), Japan is ranked 5th (as of 2011) because the amount paid back has recently been increasing. <Gross Basis> <Net Basis> (million dollar) (Source)OECD data (Note)Figure in parentheses are actual in CY

74 71 Discussion 7. Agriculture, Forestry and Fisheries The size of the livestock industry, etc., has increased and the ratio of full-time farming households has risen, whereas the development of land-extensive farming is very slow and the ratio of full-time rice growers still remains low. Also, the aging of the population is advancing. Based on such situations, it is necessary to enhance the constitution of agriculture so as not to rely on subsidies, by expanding the scale and reducing production cost. Change in average operating size per farmer (by operating sector) Operating farmland (hectare) By operating sector (National) Rate of scale expansion National (2012/2010) Hokkaido (2012/2010) Other prefecture (2012/2010) Paddy rice (are) Dairy cattle (number of cattle) Beef cattle (number of cattle) Hog raising , , , (number of hog) Chikin egg farming - 1,037 20,059 33,549 44,987 48, (number of chickens) Broiler chicken farming - 21,400 31,100 38,600 44, (number of chickens) Source: Agriculture and forestry census, Animal husbandry statistics, Livestock rearing trend and Livestock logistics and distribution statistics issued by the Ministry of Agriculture, Forestry and Fisheries Note 1: Data concerning farming land and wet-rice cultivation as of 1995 are those of sales farming households. (Sales farming households: Farming households owning farm land equal to or exceeding 30ha, or achieving sales of agricultural products of 500 thousand yen per year.) Note 2: The pace of expansion refers to how many times the size has increased in 2011 over Shares of full-time and part-time sales farming households in terms of product category (monetary amounts) (2012) Trends in the number of farming households and the agricultural workforce Number of farming households (thousand) Sales farming households (thousand) (Proportion) 2970 (77.5) 2340 (74.9) 1630 (64.5) 1500 ( ) Full-time farmer (thousand) (Proportion) 820 (21.4) 500 (16.0) 360 (14.2) 340 ( ) Agricultural workforce (thousand) 14,540 10, Source: Agriculture and forestry census and Agriculture management statistical survey, Management statistics according to management style (individual management) (reclassified aggregation) issued by the Ministry of Agriculture, Forestry and Fisheries Note 1: Full-time farming household: A farming household whose major income sources are agricultural businesses (more than 50% of the income is obtained from agricultural businesses), and which consists of persons aged under 65 who are engaging in agricultural activities for a minimum of 60 days every year. Quasi full-time farming household: A farming household whose income obtained from agricultural businesses accounts for less than 50%, and which consists of persons aged under 65 who are engaging in agricultural activities for a minimum of 60 days every year. Part-time farming household: A farming household which does not consist of persons aged under 65 who are engaging in agricultural activities for a minimum of 60 days every year. Those aged 65 or older (thousand) (Proportion) 1710 (24.5) 1600 (33.1) 2060 (52.9) 1610 (61.6) 1520 (60.6) Source: Agriculture and forestry census and Dynamic agricultural structure survey issued by the Ministry of Agriculture, Forestry and Fisheries Note 1: The agricultural workforce from 1990 onwards is based on data for sales farming households. Note 2: The proportions of sales farming households and full-time farming households refer to the percentages of total farming households accounted for by such households. Trend in the budgets for agriculture, forestry and fisheries High level for recent years (FY2000) 3,427.9 Peak (FY1982) 3,701.0 Total amount of agriculture - forestry - fishery - related budget (FY2013) 2,297.6 (FY1975) 2,176.8 (FY1975) 1,572.0 (FY1982) 2,226.1 (FY1982) 1,475.0 Non-public works Public works (FY2000) 1,764.0 (FY2000) 1,663.9 (FY2013) 1,646.9 (FY1975) (FY2013) 650.6

75 Discussion 8. Measures for small and medium-size enterprises In order to revitalize small- and medium-sized companies/small-scale business operators who support industries, and the employment and livelihood of the Japanese people, the government shall provide support for new challenges in research and development, etc., and provide small- and medium-sized companies/smallscale business operators with intensive support for business management and financing. Breakdown of expenditure on SMEs measures(fy2013 Budget) Expenditures for runnning the Organization for Small and Medium Enterprises and Regional Innovation, Japan (SMRJ) 18.5 (10.2%) Support for SMEs in overseas 4.7 (2.6%) Others 19.8 (10.9%) Interest subsidies to Japan Finance Corporation 25.3 (14.0%) (Unit:billion yen) Subsidies to Japan Finance Corporation 5.5 (3.0%) Support for creation of local industry by SMEs 2.6 (1.4%) Community development and revitalization of commercial district 5.1 (2.8%) Expenditures on SMEs measures billion (100.0%) Investment in Japan Finance Corporation 59.7 (33.0%) Support for SMEs in management 16.5 (9.1%) Support for SMEs in R&D 15.4 (8.5%) Trends in expenditures on SMEs measures 250 (billion yen) Subsidies to the National Foundation of Credit Guarantee Corporations, etc. 8.1 (4.5%) (Note) The total may not agree as the number are rounded to the nearest whole number H16 H17 H18 H19 H20 H21 H22 H23 H24 H25 (FY) 72 (Note) Based on the initial budget.

76 Discussion 9. Measures for Environment and Energy Expenditure on environmental conservation The budgets necessary for steadily conducting environmental preservation activities such as waste recycling measures, as well as global environment conservation projects (e.g., the funding project for the adoption of recyclable energy), are secured. Breakdown of FY 2013 total expenditure for environmental conservation ( 1,932.6 billion) Efforts made to achieve the targets set by the Kyoto Protocol Based on the Cancun Agreements under the United Nations Framework Convention on Climate Change, budget is secured to continuously take measures against global warming comprehensively and systematically in FY2013 and thereafter. emissions (billion ton-co2) Greenhouse effect gas emissions (1.6% against base year) (-4.3% against base year) (-0.3% against base year) (+3.7% against base year) Aiming to reduce 3.8% by adopting measures concerning forests and other sinks, and 1.6% by adopting the Kyoto mechanism (-6% against base year) (against -0.6% base year) FY2013 Budget (unit:billion yen) Budget for countermeasures against global warming * Overlap expenses for the above-mentioned environmental preservation Effective approaches to reduce greenhouse gases by grants for the support of business operators promoting rationalization of the use of energy, project to establish a bilateral offset credit system, etc. Effective approaches to reduce greenhouse gases after Project to verify technology to reduce carbon dioxide, the projects concerning the development of technologies against global warming, etc. Those eventually contributing to the reduction of greenhouse gases Subsidy for projects to verify improved power grids for wind power generation, grants for promoting a recycling-oriented society, etc. Base year (1990, in principle) Kyoto Protocol reduction promise (2008 to 2012) 73 Fundamental programs, etc Project for the demonstration of technologies and systems for rationalization of international energy consumption, reinforcement of the Ibuki (GOSAT) observation system, improvement of the system for the development of the successor to Ibuki, etc.

77 Discussion 10 Personnel Cost of National Public Servants The central and local governments have been pushing ahead with reforms on personnel cost on civil servants in terms of the number and salary of civil servants. Personnel costs and number of civil servants Central government officials Number of personnel 558 thousand Personnel cost 4.8 trillion yen Administrative agencies Number of personnel 297 thousand Self-defense officials, Special agencies Number of personnel 260 thousand General administration Number of personnel 916 thousand Local government officials Number of personnel 2,406 thousand Personnel cost 23.4 trillion yen Education (teachers at public schools) Number of personnel 1,048 thousand Police staff, fire fighters and public corporation employees Number of personnel 442 thousand (Note 1) Numbers of personnel of national administrative organs and special organs refer to total numbers according to the general account and special account (budget number of personnel at the end of FY2013), the number of self-defense officials refers to the actual number, and numbers of local civil servants refer to those (for the general account) as of April 1, 2012 according to Local financial situations (March 2012) issued by the Ministry of Internal Affairs and Communications. (Note 2) The special organs refer to the Diet, Courts of Justice, Board of Audit and National Personnel Authority. (Note 3) Personnel expenditures refer to the total amount of the general account and special accounts at the national level (based on the budget for FY2013), and the settlement amount of the general account for FY2011 at the local level based on Local fiscal situations (March 2013) (Ministry of Internal Affairs and Communications). Efforts to reduce personnel costs for public servants National civil servants - In order to deal with tough financial conditions and the aftermath of the Great East Japan Earthquake, salary shall be reduced in FY2012 and FY2013 based on the Act on revision and temporary exception of salary of national civil servants, as a temporal and exceptional measure under the present National Personnel Authority's recommendations. - FY2012: minus billion yen - FY2013: minus billion yen - Retirement benefits have been decreased based on the revised Act on Retirement Benefit for National Civil Servants. The number of reduced employees has been substantial. Local public servants - In line with the reduction of salary for national civil servants, salary will be reduced from July 2013 in the same way as for national civil servants so as to reduce expenses for the salary of local public servants in local fiscal plans. - FY2013: minus billion yen - Retirement benefits have been decreased in line with national efforts. The number of reduced employees has also been substantial. (Reference) International comparison of the number of servants per 1,000 people (Note 1) Data prepared by Ministry of Internal Affairs and Communications (Note 2) The figures represent the FY2010 data for Japan, U.K. and the U.S., the FY2009 data for Germany and France. (Note 3) represents the number of civil servants at the central government level (excluding defense). 74