Current Japanese Fiscal Conditions and Issues to be Considered

Transcription

1 Current Japanese Fiscal Conditions and Issues to be Considered 2006 Ministry of Finance

2 Table of Contents I Current Fiscal Situation 1 1. FY2006 General Account Budget 1 2. Trends in General Account Expenditures and Tax Revenues 4 3. Accumulated Government Bonds Outstanding 5 4. International Comparison of Fiscal Conditions 8 5. Aging Society Increase in Social Security Related Expenditure The National Burden Ratio National Fiscal Administration and National Economy 13 (Column) Problems with Fiscal Deficits 15 II Future Issues for Fiscal Administration 16 Overview 1: Principles for Fiscal Management 16 (Column) Primary Balance 17 Overview 2: Measures for Expenditure Reforms (FY2006 Budget) 18 (Column) National Financial Statements 25 (Column) Outline of Differences between Total, Net Total and Business-Accounting Bases (FY2003 Settlements) 26 Discussion 1: Social Security 27 Discussion 2: Central and Local Governments 33 Discussion 3: Infrastructure Development 37 Discussion 4: Other Areas 39 (Appendix 1) Trends in Fiscal Conditions 43 (Appendix 2) Projections for Effects of FY2006 Budget on Future Outlays and Revenues 45 (Appendix 3) Glossary 48

3 I Current Fiscal Situation 1. FY2006 General Account Budget Basic Principles in FY2006 Budget With respect to expenditures, the FY2006 budget reflects the results of various reforms that the priority to selected areas in budget allocation. As a result, the amount for general expenditures comes to below the level for the previous year. New government bonds issues will drop to 29,973 billion yen, below the 30 trillion level for the Thus, we have successfully implemented our policy of maintaining and strengthening fiscal discipline in General Account Budget (FY2006 Budget) FY2005 (lnitial) FY2006 (lnitial) (Revenue) Tax Revenues 44, ,878.0 Non-tax Revenues 3, ,835.0 (excluding NTT interest-free loan redemption 3, ,835.0) Government Bond lssues 34, ,973.0 TOTAL 82, ,686.0 (Expenditure) National Debt Service 18, ,761.6 Local Allocation Tax Grants, etc. 16, ,558.4 General Expenditures 47, ,366.0 Subsidies for redemption of NTT interest-free loans TOTAL 82, ,686.0 General account expenditures for FY2006 are approximately 80 trillion yen, of which national debt service (expenditure allocated to interest payment and debt redemption on government bonds) accounts for approximately a quarter. General expenditures are defined as General account expenditures minus national debt service and local allocation tax grants, etc. Social security related expenditures account for more than 40 percent of general expenditures. General (unit: billion yen, %) Expenditures National Debt 46,366.0 (58.2) Service Social Security 18, ,573.9 (23.5) General (25.8) AccountTotal Expenditures Public Works 7,201.5 Local Allocation Former Millitary Personnel Pensions (and others) (100.0) (9.0) Tax Grants,etc (1.3) Education&Science Economic Assistance 721.8(0.9) 14,558.4 National Others 5,267.1 Food Supply 636.1(0.8) (18.3) Defense (6.6) 8, ,813.9 Energy 470.9(0.6) (10.7) (6.0) Promotion of SMEs 161.6(0.2) Transfers to the Industrial Investment 48.1(0.1) Miscellaneous 5,122.2(6.4) Contingencies 350.0(0.4)

4 Note: General Account Expenditures, National Debt service, Local Allocation Tax and General Expenditure: see p48 Cabinet has been working on. Furthermore, we conducted a strict review of overall expenditure and gave 46,366 billion yen, and the amount for general account expenditures totals 79,686 billion yen, they dropping first time in five years, and the general account primary balance will improve for the third consecutive year. the budget for FY2006, and reflected further advancing efforts toward fiscal consolidation on the budget. (unit: billion yen) Note 1,871.0 Ratio of tax revenues to total revenues: 57.6% (FY2005: 53.5%) Bond dependency ratio: 37.6% (FY2005: 41.8%) Including increases in fixed-rate transfers due to a rise in outstanding government bonds (643.9) Including reduction in Grants for planned tax resources transfer (629.2). Including a rise in ratio of the central government contribution to basic pension and an expansion of child-care allowance (291.0). Only just under 60 percent of total revenues are covered by tax revenues, while nearly 40 percent (approx. 30 trillion yen) depend on government bond issues. Government Tax and Stamp Bond Issues Revenues 29, ,878.0 (37.6) Income Tax (57.6) Special Deficit- 12,788.0 Financing Bonds (16.0) General 24,489.0 AccountTotal Corporation Tax (30.7) Revenues 13,058.0 Construction (16.4) Bonds (100.0) 5,484.0 Consumption Tax (6.9) Others 10,538.0 Other 9,494.0 (13.2) Revenues (11.9) 3,835.0 (4.8) (unit: billion yen, %) Gasoline Tax 2,156.0(2.7) Liquor Tax 1,572.0(2.0) Inheritance 1,380.0(1.7) Tobacco Tax 940.0(1.2) Customs Duties 906.0(1.1) Motor Vehicle Tonnage Tax 737.0(0.9) Other Taxes 586.0(0.7) Stamp Revenue 1,217.0(1.5)

5 Comparison of the Government Budget to a Household Budget Household Budget for a month (unit: thousand yen) FY2006 Government Budget (General Account, trillion yen) Household monthly income 400 Tax and Non-tax Revenues 49.7 Household expenditures 370 Monthly Allowance for Children 120 (Pricncipal and Interest) Payment on Loans 150 General Expenditures 46.4 Local Allocation Tax, etc National Debt Service 18.8 Shortfall = Borrowing 240 Government Bond Issues 30.0 Result: Loans Outstanding 52,000 Bonds Outstanding 542 (Preconditions for household budget) The household monthly income is estimated with reference to the average monthly after-tax income for a model case in the 2004 recalculation of national and employees pensions. Other figures are calculated in proportion to each item in the Government Budget.

6 2. Trends in General Account Expenditures and Tax Revenues There has been a large gap between general account expenditures and revenues: a fiscal deficit. The deficit is financed by government bond issues, and tax revenues account for less than 60 percent (57.6%) of general account revenues in the FY2006 Budget. (Trillion Yen) Total Expenditures Tax Revenues Govt Bond Issues Note: FY1983-FY2004: settlement, FY2005: revised budget, FY2006: initial budget (FY)

7 3. Accumulated Government Bonds Outstanding Government bonds outstanding have increased due to continued bond issuance in the past years. Government bonds outstanding at the end of FY2006 are expected to reach approximately 542 trillion yen, placing a heavy burden on future generations. 1) Trends in Government Bonds Outstanding 600 (Trillion Yen) 550 Equal to approx. 12 year s General Account tax revenues Tax revenuesinfy2006 General Account Budget: approx. 46 trillion yen (Note 3) Equal to the sum of gross liabilities of all developing countries at the end of 2004: approx. 328 trillion yen For reference: FY2006 Government bonds outstanding: approx. 542 trillion yen (projection) Approx million yen per person Approx million yen per family of 4 Average disposable income of a working family: approx million yen (Average family size: 3.48) (Note) Disposable income and family size are based on the FY2004 Survey of Household Economy by the Ministry of Internal Affairs and Communications Special Deficit - financing Bonds (FY) (Notes) 1. FY : actual, FY2005 and FY2006: estimates. 2. The special deficit-financing bonds outstanding include refunding bonds for long-term debts transferred from Japan National Railway and the National Forest Service, etc. 3. The estimates for FY2006 include redemption by usage of the surplus funds of the Special Account for Fiscal Loan Program Funds (12 trillion yen). 4. The estimates for FY2005 and FY2006 excluding front-loaded issuance of refunding bonds are approx. 506 trillion yen and 517 trillion yen, respectively Construction Bonds

8 2) Analysis of Factors for Increase in General Bonds Outstanding General Bonds outstanding are expected to increase by 375 trillion yen from FY1990 to FY2006, out of which an increase in expenditures accounts for 129 trillion yen and a decrease in tax revenues for 142 trillion yen. In the 1990s the main factor for expenditure growth was the increase in public works related expenditures, while recently it has been the increase in social security related expenditures accompanying the aging of Japanese society. Increase in General Bonds Outstanding from FY1990 to FY2006: 375 trillion yen Contribution of expenditures: 129 trillion yen (trillion yen) Public works related expenditures (60 trillion yen) Social security related expenditures (88 trillion yen) Other expenditures excluding debt redemption (FY) Effect of tax revenue decline: 142 trillion yen 20.0 (trillion yen) 15.0 Tax revenues Non-tax revenues (FY) Difference in FY1990: approx. 45 trillion yen Primary balance in FY1990: 7 trillion yen Increase by 3 trillion yen per year multiplied by 16 Others (long-term debt transferred from JNR and disposal of nonperforming loans, etc.): 59 trillion yen (Note) FY : actual figure; FY2005: revised budget; FY2006: initial budget.

9 If the 542 trillion yen in debt outstanding were stacked up in 10,000 yen bills how high would it reach? 1,400 times Nemuro Amami Oshima Mt. Fuji Tokyo Nemuro Amami Oshima 3,548km bills, the height would be 5,420km, which is 1,400 times higher than Mt. Fuji (3,776m) and 600 times higher than Mt. Everest (8,848m)! stretch about 1.5 times the distance between Nemuro and Amami Oshima (3,548km). 3) Long-term Debt Outstanding The amount of long-term debt outstanding, the sum of central government long-term debt outstanding such as general bonds and borrowings and local governments long-term debt outstanding, is expected to reach approx. 775 trillion yen at the end of FY2006. (unit: trillion yen) FY1995 <Settlement> FY2000 <Settlement> FY2004 <Settlement> FY2005 <Revised Budget> FY2006 <Initial Budget> National Government (570) 605 (580) General Bonds (506) 542 (517) Local Gov Duplication Total (740) 775 (750) Percentage of GDP 82.7 % % % % (146.8 %) % (145.9 %) (Note) 1. GDP for FY2005 is an estimated figure, that for FY2006 is a government forecast. 2. FY2006 includes redemption by usage of the surplus funds of Special Account for Fiscal Loan Program Funds. 3. Figures in parentheses for FY2005 and FY2006 exclude front-loaded issuance of refunding bonds. 4. Government bonds outstanding of the Special Account for Fiscal Loan Program Funds are approx. 141 trillion yen. (end FY2006).

10 4. International Comparison of Fiscal Conditions In terms of the ratio of the general government fiscal deficit to GDP, Japan s fiscal conditions are the worst among developed countries as a result of the increase in social security related expenditures accompanying the rapid aging of society and tax cuts aimed at an economic recovery. (As a percentage of GDP) (CY) Japan United States 0.1 United Kingdom Germany 1.3 France Italy Canada (Note) Figures show general government financial balances on an SNA basis. For Japan and the USA, where pension systems are based on a Modified Funded System, the figures exclude social security funds, which are regarded as future liabilities in real terms. If these were included, the figures for Japan and the USA would be as follows Japan 0.8 United States *Source: OECD Economic Outlook 78 (December 2005). Figures are calculated on an SNA basis. (Note) FY2006 budget of Japan is not reflected in the above data.

11 In terms of the ratio of general government debt to GDP, some developed countries were steadily implementing fiscal consolidation in the late 1990s. However, Japan s gross debt has rapidly worsened to reach the worst level among developed counties. (As a percentage of GDP) (CY) Japan United States United Kingdom Germany France Italy Canada *Source: OECD Economic Outlook 78 (December 2005). Figures are calculated on an SNA basis. (%) Japan 120 Italy Italy Canada USA Japan France Germany Canada USA France UK Germany UK (CY) (Note) FY2006 budget of Japan is not reflected in the above data. (Reference) Net debt (%) 120 Net debt is another indicator for government debt outstanding. Net debt is calculated by subtracting government s financial assets from its gross debt outstanding. It should be noted that more than half of the government s financial assets are intended to be used for future pension payments, etc., and cannot be used to pay back the financial liabilities. Japan s ratio of net debt to GDP is expected to be 82.5 percent in In terms of net debt as well as gross debt, Japan s fiscal situation is severe Canada 60 USA 40 Germany UK 20 France Japan Italy Italy Japan Germany France USA UK Canada (CY) *Source: OECD Economic Outlook 78 (December 2005). Figures calculated on an SNA basis.

12 5. Aging Society In Japan, aging society is progressing faster than in any other developed country and expected to progress in the further. 1) Ratio of People Aged 65 and over to the Total Population 2) Changes in the Demographic Pyramid

13 6. Increase in Social Security Related Expenditure In Japan, social security related expenditure is increasing with aging, exceeding 40 percent of total general expenditure. Those trends are expected to continue more rapidly and further deteriorate fiscal conditions. (Note) Based on initial budget

14 7. The National Burden Ratio The national burden ratio is defined as the sum of total taxes and social security contributions as a percentage of National Income (NI). The current national burden ratio for Japan is at a low level compared to other developed countries. However, this is because the current generation is not shouldering enough of the costs relative to the benefits and passing the burden on to the next generation as fiscal deficits. Japan s national burden ratio is projected to rise with aging if the current system is not changed. 1) International Comparison of National Burden Ratio [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 as a percentage of NI] Social Security contributions as a percentage of NI Total tax as a percentage of NI The fiscal deficit as a percentage of NI Potential National Burden Ratio National Burden Ratio Japan (FY2006) United States (CY2003) 4.2 United Kingdom (CY2003) Germany (CY2003) France (CY2003) (Notes) 1. Japan: FY2006 budget. United States, United Kingdom, Germany, France and Sweden: Actual CY2003 date. 2. Fiscal deficit as a percentage of National income for Japan and the United States excludes social security funds. 0.1 Sweden (CY2003) 2) Trends in National Burden Ratio (Unit: Percent of NI) Fiscal Year Ratio of Tax Ratio of National Ratio of Social National Fiscal Deficit as a Potential National Burden to NI Tax Burden to NI Security Contributions Burden Ratio Percentage of NI Burden Ratio (*)17.7 (*) (*)11.0 (*) (Notes) 1. FY1970-FY2004: actual figures; FY2005 and FY2006: estimates. 2. Figures in (*) include debt transferred from Japan National Railway and the National Forest Service in FY1998 and the Honshu-Shikoku Bridge Authority in FY The fiscal deficit in FY2006 excludes transfers from surplus funds of the Special Account for Fiscal Loan Program Funds (12 trillion yen).

15 8. National Fiscal Administration and National Economy Social security related expenditure is expected to continue to increase with the aging of Japanese society. This will lead to various issues including negative impacts on the economy due to a rise in the potential national burden ratio, further expansion in inequality between generations, and decreased flexibility in fiscal policy resulting from large fiscal deficits. 1) Correlation between the Potential National Burden Ratio and Economic Growth Rate in OECD countries Rise in the potential national burden ratio may hamper the country s economic growth. (Notes) 1. Based on OECD/National Accounts. 2. Average from 1971 to 2001 (Source) Cabinet Office/ Economic and Fiscal Report in FY2003 2) Lifetime Benefits and Burdens by Generation Under the current system, younger generations will face an increased excessive net burden (per family, 10 thousand yen) Total benefit Lifetime net benefit Total burden Future generations People in their 20s People in their 30s People in their 40s People in their 50s People in their 60s and over (Source) Cabinet Office/ Economic and Fiscal Report in FY2005

16 3) Increasing Budget Rigidity Due to an increase in debt outstanding, the ratio of national debt service (the costs of debt redemption and interest payments) within general account expenditures has risen. Consequently, the ratio of general expenditures used for policymaking purposes has greatly decreased, and fiscal capacity to respond to society s needs has weakened. 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 0.6% 19.6% 79.8% (14.1%) 4.9% 20.7% 74.4% 19.5% 23.5% 18.5% 62.0% (18.4%) (18.2%) 18.3% 58.2% (25.8%) (Notes) 1. Based on initial budget. 2. Local allocation tax grants for FY2006 include special grants for local governments. National Debt Service Local Allocation Tax Grants, etc. General Expenditures, etc. Social Security Related Expenditure (FY) (Reference) Trends in Interest payments While government bonds outstanding are increasing dramatically, interest payments have been kept low due to the recent low interest rates. However, interest payments could greatly increase depending on future trends in interest rates. (trillion yen) Interest payment per year: 8.6 trillion yen Equivalent to 1.2 year s public works related expenditure (7.2 trillion yen) Interest payment per day: 23.7 billion yen Equivalent to the cost of two H2A rockets (10.0 billion yen) Interest payment per hour: 1 billion yen Equivalent to the construction cost of an average elementary school with 18 classes (1.1 billion yen) Government Bonds Outstanding (trillion yen) Interest Payments (FY) Estimated Impact of 1 percent Increase in Interest Rates on National Debt Service FY2007 FY2008 FY trillion yen 2.8 trillion yen 4.0 trillion yen (Note) Estimated increase in national debt service if interest rates rise by 1 percent after FY2007 in Projections for Effects of FY2006 Budget on Future Outlays and Revenues. Note: FY1975-FY2004: settlement, FY2005: revised budget, FY2006: initial budget.

17 Problems with Fiscal Deficits (Reference) Economy and Fiscal Administration (example: USA in the 1990s) revenues were made to improve fiscal conditions in the United States. Together with an upturn in the economy, a fiscal surplus was achieved in FY1998. principle, and measures on both the expenditures and revenues sides contributed to fiscal consolidation. the private sectors. These contributed to stable economic expansion.

18 II Future Issues for Fiscal Administration Overview 1: Principles for Fiscal Management (%) The government is promoting fiscal structural reforms on both the expenditures and revenues sides and aims to achieve a surplus in the primary balance of the central and local government combined in the early 2010s. In particular, before the middle of 2006, the government will clarify options for the direction of expenditure and revenue reform and the process of the reform. By the end of FY2006, the government will reach a conclusion concerning the expenditure and revenue reform. (Cabinet Decision in January 2006) 3. Basic Policy for Medium-Term Economic and Fiscal Management (3) Restoring Fiscal soundness Toward fiscal soundness, the government will continue to limit the size of government and, at first, aims to achieve a surplus in the primary balance of the central and local government combined in the early 2010s. To achieve this goal, beyond FY2007, it is necessary for the government to continue the same level of effort as before to improve the financial balance and to realize sustainable economic growth led by private-sector demand. Taking into consideration medium and long term issues such as intergenerational equity, and based on the results of past reforms, the government will examine the targets of government expenditures, medium-term goals for the size of government and in the major areas of expenditure both for the central and local governments, and issues related to revenues in an integrated manner. Moreover, the government will then clarify options and the process of the Integrated Reform of Expenditures and Revenues by around mid In order to make economic vitality and sound fiscal management compatible, the government will thoroughly consider the effects on the economy of the Integrated Reform of Expenditures and Revenues. When requesting an increase in burdens, the government will study what form those burdens should take by considering the effects on the economy and society. Through these steps, the government intends to reach the conclusions of the Integrated Reform of Expenditures and Revenues within FY Nominal GDP growth minus nominal interest rate (%) * "SNA": see page Ratio of primary balance of central government to GDP (%) Ratio of primary balance of local governments to GDP (%) Ratio of primary balance of central and local government combined to GDP (%) (FY) (Source) Cabinet Office / National Account, IMF / International Financial Statistics (Notes) 1. Primary balance is calculated by budget deficit minus net interest payment 2. Primary balances in FY2004 and FY2005 are estimates by the Cabinet Office. 3. Primary balance of general account (national debt service minus government bond issues ) in FY2005 was trillion yen and that in FY2006 was trillion yen. (As a percentage of GDP) CY Japan USA UK Germany France Italy Canada (Note) The table above shows figures for general government as a whole (central and local governments plus social security funds ) on a calendar year basis. The scope and period of compilation differ from those in the graph above (FY2005: -3.3, FY2006: -2.8), which are compiled on a fiscal year basis for central and local governments. * "General government": see page 49. (Source) OECD Economic Outlook 78 (December 2005)

19 Primary Balance Primary Deficit Revenue Interest Payment Government Bond Issues Primary Deficit Tax Revenue, etc. Expenditure Debt Redemption General Expenditures, etc. Primary Balance The situation of whether discretionary expenditures for a given year are furnished by tax revenues for that year without resorting to fresh borrowing. Meaning of Primary Balance Primary balance is defined as the fiscal balance reached by subtracting expenditures excluding interests and debt redemption from tax and other revenues excluding borrowings When a primary surplus is achieved, expenditures excluding interest payment and debt redemption are covered by tax revenues, etc. for that year. In recent years, Japan has suffered a huge primary deficit. First of all, the government aims to achieve a primary surplus in the early 2010s in order to build a sustainable fiscal structure and to restrain expansion of accumulated bonds outstanding relative to the scale of the economy which would shift the burden to future generations. The situation where discretionary expenditures foragiven year are furnished by tax revenues for that year without resorting to fresh borrowing. Revenue Expenditure When primary expenditures and revenues are balanced, Government Bond Issues Increase in fresh borrowing Debt Redemption Decrease in Debt Interest Payment Tax Revenue, etc. General Expenditures, etc. National Debt Service if nominal interest rate exceeds nominal GDP growth rate. mains constant if interest rate is equal to nominal GDP growth rate. creases if nominal GDP growth rate exceeds nominal interest rate. Increase in Net Debt Outstanding

20 Overview 2: Measures for Expenditure Reforms (FY2006 Budget) The Ministry of Finance has attempted to implement reforms in its compilation of the FY2006 budget in order to promote further expenditure reform. Reflection of the results of reforms Revision of contents and scope of benefits to ensure sustainability of medical care system. Decrease in number of public officers and reform of general personnel expenses Thorough review of public interest corporations funds and return of unnecessary funds to the treasury Prioritization of Budget Allocation [Budget Concentration in Priority Areas] Promotion of large-scale R&D project, Promotion of a strategy for creating new industries, Compulsory education reform, Construction of information and telecommunication infrastructure, and Program for revitalization of regional knowledge. Support of town development, Agricultural reform, Support of manufacturing skills, Realization of a popular tourist country, Security Measures, and Ensuring security of schools. Promotion of child raising, Strategy for health frontier, and Judicial reform. Utilization of Kyoto framework and Promotion of regional policy to counteract global warming. Community Development Grants, Airports for urban areas, Anti-earthquake measures, Ring roads in the three largest urban areas, and Flood control measures. [Inter-ministerial Coordination] <Year-on-year percentage changes in major expenditure categories> +0.9% Education and Science +1.1% Defence Public Works ODA SME promotion Energy Food Supply Social Security 8.0% Science 0.9% 4.4% 3.4% 6.6% 4.9% 5.8% only

21 Improving Budget Quality and Efficiency gets are achieved, utilize these for budget compilation and improve budget quality and efficiency with reviews for each expenditure item Plan (Formulation) Action (Feedback) Management Cycle Do (Execution) Check (Evaluation) 1) Budget execution survey 2) Settlement audit reports 3) Policy evaluations, etc. I Reflection of budget execution Reflect budget execution results in budget compilation, reviewing each expenditure item (66.2 billion yen) Example: Beeper fee abolished due to lack of budget execution (23 million yen) II Reflection of budget execution survey Budget examiners visited the locations of budget execution to inspect the effect of projects, progress of projects and cost-benefit performance. Improve budget execution, reflect on FY2006 budget and promote budget efficiency based on the budget execution survey. 53 projects were surveyed in FY2005. (26.0 billion yen) Example: Projects for nature friendly housing development were abolished due to decreased necessity of the government s involvement taking into account the number of houses and development bylocal governments and private sector. (100 million yen) III Reflection of settlement audit report Reflect settlement audit report by Board of Audit and the recommendations by the Diet on the FY2006 budget Example: Abolition or reduction in charitable organizations funds financed by subsidies (119.5 billion yen) Abolition of subsidies for industrial relocation (300 million yen) Abolition of special allowance for executive of diet personnel (200 million yen) IV Utilization of policy evaluation Establish clear targets and ex post evaluation methods, and employ these in the budget compilation process. Strengthen the link between budget and policy evaluation. Example: Assurance of railroad security (target) Reduce the number of railroad crossings without crossing bars to under 4,800. (ex post evaluation method) Survey of actual results achieved and railroad crossing accidents. (5.0 billion yen) Results-oriented projects Establish quantitative target and ex post evaluation and allow for more flexibility in budget execution (71 projects, billion yen) V Policy Packages The aim of policy packages is to promote collaboration between ministries and agencies, eliminating duplication of budget items between them. The government has continued implementation of 18 policy packages in FY2006. (10 were taken on board in FY2004 and 8 in FY2005) Example: inventing the world s most advanced environmentally-friendly cars (11.1 billion yen in FY2006 budget) The target is to disseminate 10 million practical-use environmentally-friendly cars and 50 thousand fuel-cell cars by FY2010. Eliminate duplication of measures to introduce environmentally-friendly cars and strengthen collaboration in inter-ministerial councils. VI Streamline administrative costs example: Citizen judge system enlightenment project (target) Improve recognition of the system to 100 percent and participation rate to 70 percent. (relaxation) Relaxation of execution between line items (300 million yen) Reduce administrative costs due to revision of security contracts and utilization of discount airline tickets etc. Example: Review of security contracts for the Guest House in Kyoto (74 million yen) Utilization of discount airline tickets (338 million yen)

22 Review of Special Accounts What Are Special Accounts? The accounts of central government consist of general account and special accounts. Special accounts can be set up to carry out specific projects, to manage specific funds, and for other purposes. Legal Basis for Special Accounts The Finance Law stipulates that special accounts can be set up when the government: implements a specific program, possesses and manages special funds, uses certain revenue to secure special expenditure and thus needs to deal with such revenue and expenditure on a separate basis from the general revenue and expenditure. As of April 1, 2005, the government had 31 special accounts. Flow of Funds in Special Accounts (FY2006 Budget) The gross total outlay, calculated by simply adding each outlay for special accounts, is around trillion yen as each special account covers different areas. However, the inter-account transactions include a lot of overlapping and duplicate items. If these are omitted, the net total outlay is around trillion yen. Internal transactions within Special Accounts 12.5 Debt redemption costs for refunding bonds from the Government Bonds Consolidation Funds Inter-Account transactions Special Accounts Outlays Gross Total Outlays General Account Outlays 79.7 Carried over to Special Accounts 46.3 Carried over to General Account 0.4 (unit: trillion yen) General Account Net Outlays 33.4 Special Account Net Outlays Debt redemption and interest payment Local allocation tax and special grants for local governments 19.2 Carried over to Fiscal Loan Program Funds 27.2 Pension benefits and medical care benefits 49.9 Others 12.3 Net Total Outlays (unit: trillion yen) Gross total outlays Of which, general account 79.7 Carried over to special accounts 46.3 Net outlays 33.4 Of which, special accounts Inter-account transactions Internal transactions within special accounts 12.5 Carried over to general account 0.4 Debt redemption costs for refunding bonds Net outlays payment and local allocation tax carried over to Fiscal Loan Program Funds and social security benefits from net total outlays (225 trillion yen) because these outlays are to be discussed separately. Gross Total Outlays of 31 Special Accounts 460 (unit: trillion yen) Net Total Outlays 225 (Gross total outlays minus duplications) Duplicate Gross total outlays are accounting figures including transactions between special accounts. 12 Welfare Insurance 50 Carried over to Fiscal Loan Program Funds 27 Local Allocation Tax 19 Debt Redemption and Interest Payment, etc. 117 (Note) The outlays in FY2005 budget corresponding to 12.3 trillion yen in the FY2006 budget were 17.2 trillion yen. If special factors were subtracted from the FY2005 budget, namely redemption costs of Fiscal Loan Program Funds (4.4 trillion yen), the figure would have been 12.8 trillion yen. In real terms, the reduction from FY2005 to FY2006 came to 0.5 trillion yen.

23 The breakdown of 12.3 trillion yen trillion yen in the FY2006 budget, whereas that for FY2005 was 17.2 trillion yen. If special factors were subtracted from the FY2005 budget, namely redemption costs of the Fiscal Loan Program Funds (4.4 trillion yen), the figure would have been 12.8 trillion yen. Thus in real terms the reduction in FY2006 came to 0.5 trillion yen. [Revenues] Others 6.4 ( 4.5) Transfer from general account excluding earmarked revenue sources 2.2 ( 0.3) 12.3 Earmarked revenue (-4.9) sources transferred through general account 2.6 ( 0.1) Earmarked revenue sources transferred directly 1.1 ( 0.04) [Expenditures] Promotion of power source development 0.4 ( 0.05) Foreign exchange funds Others 0.5 ( 0.04) 0.9 Measures for petroleum and ( 0.3) advancement of energy demand and supply structure 0.7 ( 0.03) Foodstuff control 0.8 ( 0.04) 12.3 ( 4.9) Public investment 5.9 ( 0.1) (unit: trillion yen) Insurance (Social security) 2.7 ( 4.4) Insurance (Others) 0.3 (+0.03) (Note) Figures in parenthese are year-on-year changes. Achievement of Special Accounts Reform Contribution to fiscal consolidation 1. Utilize accumulated funds and surplus funds Transfer of 13.8 trillion yen to general account and special accounts for Government Consolidation Funds 1) SA for Fiscal Loan Program Funds: 12 trillion yen 2) SA for Foreign Exchange Funds: 1.6 trillion yen 3) SA for Industrial Investment: billion yen 4) SA for Promotion of Power Source Development: 59.5 billion yen 5) SA for Agricultural Foundation Improvement Measures: 29.5 billion yen 2. Thorough expenditure cuts [Example of expenditure cuts] 1) Personnel expenses and administrative costs 2) Correction of disparity between budget and settlement 3) Reduction in outlays for special public corporations Direction toward special accounts reform accounts over five years. were established in cial accounts, will be submitted to the Diet in 2007 and the reform will be completed in the next five years.

24 The Process of Special Accounts Reform Special Account FY2006 FY2007 FY2008 FY2009 FY Road Construction and Improvement Flood Control Harbor Improvement Airport Improvement Urban Development Loans Integrate by FY2008. Special funding sources for road work will be reviewed in accordance with the Basic Policies for the Review of the Special Funding Sources for Road Work (agreement among the Government and Ruling Parties reached on Dec. 9, 2005). Examine transferring the SA for Airport Improvement to an independent administrative agency. In the future, the government will examine shifting the aircraft fuel tax to general revenues in principle. 2 National Pension Welfare Insurance Integrate by FY2007. Administrative costs for pensions will be partly financed by premiums on a permanent basis from FY Seamen s Insurance Further study the review of the system. The portion of seamen s insurance corresponding to health insurance will be transferred to public institutions, and the labor insurance and employee insurance portions will be integrated into the respective systems in the Labor Insurance SA around FY Labor Insurance Agricultural Mutual Aid Reinsurance Fishing Boat Reinsurance Earthquake Damage Reinsurance Forest Insurance Labor welfare operations and the three operations of employee insurance will be thoroughly reviewed, including the option of abolition. The central government contributions to unemployment benefits will be examined, including the option of abolition. The management of accumulated funds will be made more transparent, and the handling of the reinsurance function, including integration of the two accounts, will be examined by FY2008. Examine the handling of the reinsurance function by FY2008. Examine transferring operations to an independent administrative agency by FY Trade Reinsurance National Forest Service Examine making a systemic revision in the next three years or so, and reach a final decision. (Integrate the National Forest Service Account and the Conservation Account in April 2006.) Examine integrating the integrated account into the general account or transferring it to an independent administrative agency in FY National Land Improvement Integrate this SA into the general account by FY2008. (Make a final decision about the classification of central and local governments in FY2006.) Food stuff Control Agricultural Foundation Improvement Measures Compensation Protection and Registration Integrate in FY2007. Integrate in FY2008. Examine integrating this SA into the general account or transferring it to an independent administrative agency. Examine integrating this SA into the general account or transferring it to an independent administrative agency Patent Registration National Center for Advanced and Specialized Medical Care Aim at improving operating efficiency and expanding commissioning of operations to the private sector, by setting up mid-term quantitative targets. Transfer the National Cancer Center, etc. to independent administrative agencies, and abolish this SA, taking the necessary measures for management, including the treatment of debt. 15 Registration Integrate this SA into the general account at the end of FY Designated National Properties Consolidation Integrate this SA into the general account around FY Promotion of Power Source Development Measures for Petroleum and the Advancement of Energy Demand and Supply Structure Industrial Investment (Social Capital Development Account) Industrial Investment (Industrial Investment Account) 19 Fiscal Loan Program Funds Pass legislation for the integration of the two accounts by FY2007. Review the system of putting Power Source Development Promotion Tax revenues into this SA, and transfer funds from the general account to this SA. With the completion of the no-interest loan projects, this account will be abolished. This account will be transferred to the SA for the Fiscal Loan Program Funds by FY2008. This account will then be examined, including the option of abolition. Reduce FILP bond issuance steadily and establish a surefire redemption plan. Gradually reduce loans to local governments. 20 Government Bond Consolidation Funds Make a final decision by FY2007 about the scope of the commissioning of national bond operations to the Bank of Japan. Promote operating efficiency and the reduction of office expenses Foreign Exchange Funds Local Allocation and Local Transfer Tax Put effort into the more efficient use of personnel and office expenses. Continue to transfer most of the surplus to the general account. Draft a loan redemption schedule at an early stage.

25 Personnel Expenses Reform National public servant expenses reform will be implemented in both number and salary terms in five years based on the Plan for Personnel Expenses Reform corresponding to a cabinet decision taken on Dec ) Breakdown in expenses and number of national public servants in FY2006 (unit: billion yen) Salary of Diet members, contribution to National compulsory education expenses Public Salary Servant 2,433.4 Total Expenses 4, , ,408.6 Contribution to national mutual aid Retirement Allowance National Public Servant Expenses ,408.6 (Breakdown) (10 thousand) (billion yen) Ministries and Agencies ,287.5 Security 6.4 National Tax 5.5 Social Security and Labor 4.0 Rivers, Roads, and Harbors 2.8 Defense excluding Self-Defense personnel 2.3 etc Self-Defence personnel and Special agencies ,121.1 Self-Defense personnel 25.1 Diet 0.4 Court 2.5 etc (Reference) Number of government personnel per 1,000 people Total Central government Japan France UK USA Germany ) Plan for Personnel Expenses Reform and reflection in FY2006 budget Net decrease in personnel numbers of over 5 percent and implementation of salary system reform (1) Personnel Number Securing net decrease of over 1.5 percent through austerity in personnel management Decrease personnel number by over 3.5 percent by thorough review of operations and cutting of projects. (2) Salaries sector salaries on those of public servants, etc.) based on the National Personnel Authority s annual salary recommendations in Additionally, request the National Personnel Authority to conduct a necessary review on the comparison method for public and private sector salaries as soon as possible, and to reflect this in its annual salary recommendations in and after <FY2006 Budget> The FY2006 budget calls for the steady implementation of the Plan for Personnel Expenses Reform. (1) Number 1,362 clerical jobs, 2.7 times as large as the annual average cut of 507 jobs for the past five years) in the first year of the five-year plan in order to achieve a net reduction of more than 5,000 jobs or 1.5%. (2) Salary (Reference) Personnel expenses reform for local public servants: Overview of the FY2006 Local Public Finance Program (salary-related expenses) (1) Number: The number of local public servants will decline by a net 22,602 to about 2.43 million. (2) Salary: The salary-related expenses in the FY2006 Local Public Finance Program are estimated at 22,576.9 billion yen, down billion yen or 0.6%. The salary structure reform will be implemented steadily.

26 Asset and Liability Reform Japan needs to reduce state assets and enhance state asset-liability management in order to realize a small, efficient government and slow down debt growth. In a bid to halve state assets (excluding foreign exchange funds, pension funds and public assets like roads and rivers) as a percentage of nominal gross domestic product in the course of the next decade, the government will try to reduce state assets and proactively utilize private-sector knowledge in order to reform asset-liability management. See Section 5 of the Key Administrative Reform Policy (Cabinet Decision on December 24, 2005) on <State Assets> Major assets Specifics Availability for sale Cash, deposits and securities (liquid assets) Foreign currency assets held by the Foreign Exchange Special Account (80.6 trillion yen) Automobile liability and other insurance premium revenues, various fee revenues, settlement of account surpluses, deposits, etc. NTT (Nippon Telegraph & Telephone Corp.), JT (Japan Tobacco Inc.) and other shares held by the National Debt Consolidation Fund Loans Loans are mostly from the Fiscal Loan Fund (274.6 trillion yen). Deposits for investment Tangible fixed assets National properties (excluding public properties) Public properties 54.2 Public pension funds for independent investment 41.9 Administrative properties:35.2 trillion yen Defense facilities Government buildings, etc. Ordinary property: 6.7 trillion yen Properties provided as facilities for U.S. forces in Japan Properties leased to local governments, etc. Unused state-owned land Public facilities including rivers, roads, ports, beaches, waterways and sewage systems Goods 9.1 Most of the goods are weapons and the like (8.2 trillion) Investment 36.1 Investment in independent administrative agencies, the IMF and other international organizations, and NTT and other special companies (based on FY2003 settlement of accounts, in trillions of yen) are not suitable for sale. Even if these assets are sold, the result will be limited to a reduction in debt issues (financing bills) equivalent to the sales value. No new financial resources will be generated. them are set aside for specific spending purposes. The government is considering transferring any surpluses to the general account. But the transfer s effect on the government balance sheet will be limited.) cut loans. Securitization and sales will be considered from a wide range of viewpoints including fiscal policy. Any reduction in these loans can serve to cut a corresponding amount of debt (including Fiscal Investment and Loan bonds) and will never generate any new financial resources. Not available for sale. land, new properties offered annually for tax payments, and properties with rights. Auditing and coordination will be enhanced to sell land for unnecessary government buildings. dated to free up unnecessary land for sale. ment buildings, taking into account rental costs and reduction of national contributions. Not available for sale Not available for sale (including Narita International Airport Corporation, Tokyo Metro Co., expressway companies and Japan Post) Total assets Source: Presentation by Finance Minister, Tanigaki at the 27th meeting of the Council for Economic and Fiscal Policy on November 29, 2005 Major Undertakings for Enhancement of Asset-Liability Management (from January 2006) A panel of experts on the relocation of housing for national public servants and utilization of land vacated through relocation (from January 2006) The Cabinet decided on and submitted to the Diet a bill to revise the National Property Law to promote efficient utilization of national properties (in February 2006), and an act was promulgated (in April 2006) The Cabinet decided on and submitted to the Diet a bill on the promotion of administrative reforms in order to realize a small, efficient government (in March 2006), and an act was promulgated (in June 2006)

27 National Financial Statements The government prepares national financial statements utilizing corporate accounting standards to disclose public finance conditions. The financial statements allow us to review the combined financial flow and stock of general and special accounts in a similar manner to checking corporate financial statements. National Administrative Costs (FY2003) [Combined financial flow of general and special accounts] Others 3.1 Depreciation 4.1 Others 5.3 Local allocation tax grants, etc Ministry of Land, Infrastructure and Transport 5.4 Ministry of Education, Culture, Sports, Science and Technology 6.1 Interest payments 10.4 Operating costs Ministry of Health, Labor and Welfare 14.0 Subsidies, etc Personnel expenses 5.7 Clerical expenses 4.8 Pensions 34.3 Others 3.2 Pensions, government-managed health insurance, etc Government-managed health insurance 6.7 (unit: trillion yen) Personnel expenses Salaries paid to national public servants, transfers to retirement allowance, etc. Clerical expenses Agency expenses, public debt-handling expenses, etc. Pensions, government-managed health insurance, etc. Employee pension benefits, basic pension benefits, government-managed health insurance benefits, etc. Subsidies, etc. Subsidies to local governments and the like, grants to independent administrative agencies, commissions, etc. Depreciation Others Transfers to loan-loss provisions, transfers to liability insurance reserves for workers accident compensation insurance and earthquake reinsurance, etc. Local allocation tax grants Local allocation tax grants, local transfer tax, etc. Interest payments (Note) On an accrual basis, depreciation costs are recorded in place of public works and facility expenses. Government bond redemption costs (144.8 trillion yen), which would correspond to a private company s repayment of borrowings, are not covered here. National Balance Sheet (FY2003) [Combined financial stock of general and special accounts] (Unit: trillion yen) <Assets> <Liabilities> Cash and deposits 42.5 Financing bills 70.6 Securities 70.6 Public bonds Accounts receivable, etc Borrowings 20.2 Loans Deposits Deposits for investment 54.2 Public pension deposits Loan-loss provisions Retirement allowance reserves, etc Tangible fixed assets Other liabilities 20.3 Intangible fixed assets 0.2 Total liabilities Investment 36.1 <Asset-liability gap> Other Assets 5.5 Total of asset-liability gap Total assets Total liabilities and asset-liability gap liability gap at a negative trillion yen. But the balance of general bonds (some 457 trillion yen at the end of FY2003) is a more useful measure of liabilities shouldered by the public. This is because national properties include a considerable amount of roads and rivers that cannot be expected to be sold. * National financial statements also include those for the general account alone, and consolidated statements covering special corporations. Each government ministry or agency also prepares financial statements. See these statements for details. (Japanese only) (national financial statements) (financial statements by ministry or agency)