(Provisional Translation)

Prime Minister's Directions to the Members of the Council on Economic and Fiscal Policy at its Sixteenth Meeting

June 7, 2002

As we move towards the compilation of the so-called "the Basic Policies No.2 (provisional name)," which is scheduled for late June, I would like to set forth my views on the major issues as follows.

Tax Reform

Tax reform at this time, first and foremost, needs to be a "comprehensive and fundamental tax reform." The reform is to be initiated from FY2003 and to be completed within the time frame of the "Reform and Perspectives," i.e. by the end of FY2006. Besides, in the case that a tax incentive system is established for a specific period of time, it needs to be consistent with the overall reform.

Second, the highest priority must be placed on "vitalizing our economy and society". As the process of globalization continues, vitalizing entrepreneurial undertakings is the fundamental premise for Japan to enhance the competitiveness of its economy and to create more jobs. It is important to reduce the effective tax rate and expand the tax base.

Third, we must form "a fair society in which everyone participates and shares burden accordingly." Following principles such as "broad but light" taxation, we must move forward with tax reform and create a tax system that does not distort various options taken by individuals and corporations. We also need to establish a simple and transparent tax system that is easily understood by the people.

Fourth, "No tax reduction without resource" is the basics. Financial resources necessary to carry out the tax reform, in principle, will not depend upon the issuance of government bonds. The tax reform shall be implemented along with expenditure reform in one, thereby improving the fiscal balance over a medium-term.

Furthermore, through carefully grasping the necessary level of administrative services and expenditure, while both the national and local governments accelerate their efforts to reduce expenditure, and also through taking account of the progress in economic revitalization and the fiscal situation, I will decide on the necessary measures on the tax system within the time frame envisaged in the "Reform and Perspectives."

Local Administrative and Fiscal Reforms

Administrative and fiscal reforms in local governments need to be strongly promoted in an integrated manner. First of all, the involvement of the national government shall be reduced, and the authority and responsibility of local governments shall be greatly expanded. To be more concrete, taking account of the investigations and deliberations undertaken by the Council for Decentralization Reform, I will take the initiative and instruct my Ministers to fulfill their responsibilities to look into abolishing or cutting back state-subsidized projects, including those in welfare, education and social infrastructure, thereby reaching a conclusion by the end of this year.

Based on above, the issues of state subsidy, local allocation tax, and transfer of tax resources to local governments should be considered in trinity. I would like to see a reform plan within one year, comprising of a desirable goal and a concrete roadmap to get there.

This reform plan should aim to reduce subsidies by a few trillion yen within the period of the "Reform and Perspectives." At the same time, local allocation tax system should be reformed. Current situation, in which more than 90 per cent of the local governments are funded by the local allocation tax, needs to be drastically rectified. This reform plan therefore includes a review of the overall functions of guaranteeing financial resources to each local government, which are to be reduced during the time frame provided for in "Reform and Perspectives." On the other hand, there remains a need to correct the disparities in the fiscal strength among local governments. We must move ahead with discussions in order to determine to what extent and how the disparities should be remedied, and the results of the discussions should be incorporated in the reform plan. Parallel to these reforms, for those projects that are financed by subsidies slated for abolition but need to be carried on by the local governments' initiatives, after careful examination of the required amount, part of the national financial resources should be reallocated to the respective local governments as their own resources.

Furthermore, local governments are currently facing fund shortages amounting to approximately 14 trillion yen in total. These shortages must be eliminated as soon as possible through various efforts, including reduction of expenditure and expansion of local taxes. Thereafter the local governments shall break away from their dependence on financial resources guaranteed by the local allocation tax, aiming for the true independence of local finance.

Moreover, it is indispensable to strengthen the administrative and fiscal foundation of local governments, which is expected to serve as the vehicles for reform. With this in mind, I would like to call for an even more proactive approach to promoting municipal mergers.

Reform of the Social Security System

As the first step in reform of the social security system, I have reformed the medical care system. The necessary legislation is still under deliberation at the Diet, and I will focus my utmost efforts to ensure that it is enacted and implemented at an early date.

While continuing to implement reforms of the medical care system, I will conduct various reforms, including a review of the benefit level taking account of price trends as well as the reform of the overall pension system. Looking ahead to the reform of the pension system scheduled for 2004, for the time being the Council on Economic and Fiscal Policy is expected to clarify the following issues for reform of the pension system and continue to examine them from June onwards: creation of a system that is sustainable into the future; transformation to keep our systems in line with changes taking place in our society such as "a society in which people could be active all their lives" and "gender-equal society", inter-and intra-generational equity; and a balance of benefits and burdens, etc.

Reform of Expenditure

In order to realize "a small government of high quality worthy of the burden required," it is necessary to step up reform of government expenditure, such as improving the quality of government expenditure while accelerating its reduction and rationalization. For this purpose, I will put forward a basic guideline based on the deliberation at the Council on Economic and Fiscal Policy, and thereby each Minister shall fulfill his/her responsibility in undertaking fundamental reforms in the policies and expenditures of each Ministry and Agency.

The FY2002 budget incorporates a reduction of 5 trillion yen in the total expenditure, 2 trillion yen of which is reallocated to seven priority areas. As for the FY2003 budget, I will scrutinize and narrow down these priority areas in respect of economic revitalization effects and policy effectiveness in each area, and thus compile an even more prioritized budget. In addition, efforts will be made to reduce total personnel costs throughout the national and local governments and to accelerate the reform of expenditure across all areas, thereby achieving a goal of keeping the total general expenditure and general account expenditure equal to or below the level of FY2002 budget (once an increase in some non-discretionary expenditures is adjusted). Furthermore, restraining expenditures in the Local Fiscal Plan will be able to scale down the local allocation tax. Through these efforts the issuance of government bonds should be reduced as much as possible.

As for earmarked fiscal resources such as those for roads, they will be reviewed in an integrated manner with reviews on long-term public works plans as well as this tax system reform, and wherever possible, concrete revisions should be in place from FY2003. Before making decisions on the rates for these earmarked taxes, full consideration should be given to various favorable effects of these taxes on the environment.

Economic Revitalization Strategy

In order to revitalize Japan's economy, it is essential to capitalize on the wisdom and the vitality of the private sector through various measures such as advancing regulatory reform, including the establishment of special zones which are free from some regulations.

As for the "economic revitalization strategy," the government's policy direction will have been decided by the end of June, based on the final draft discussed at the previous meeting of the Council on Economic and Fiscal Policy. Then the measures will be swiftly and thoroughly taken by the Council for Science and Technology Policy, the IT Strategy Headquarters, and other related organizations and ministries in a co-ordinated manner. The Council on Economic and Fiscal Policy is expected to play a central role in the follow-up.


The above are my basic views on the major issues. As we move forward in compiling the "the Basic Policies No.2 (provisional name)," I would like the Council to continue its deliberations with greater vigour.

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