IV. JAPAN

1.Overview

1.1.The legal framework governing budget processes

Japan has a comprehensive legal framework for the budget system. The underpinnings of the legal framework governing budget processes are the Constitution 1946, the Public Finance Act 1947 (PFA) and the Diet (Parliament) Act 1947 (Box 1). The Constitution stipulates general principles for public finances. It requires taxes and government spending to be established by law. It also requires the Cabinet, a constitutional body, to submit a draft budget to the Diet. The House of Representatives (the lower chamber) has priority over the House of Councillors (the upper chamber) for final decisions on the budget. Finally, the Constitution establishes the Board of Audit (BOA), which audits annual final accounts of government in order to secure accountability of the government’s financial management.

Budget rules not provided for in the Constitution are mainly governed by the PFA. Unlike many countries, this law prescribes the budget process within the executive. Cabinet is given a strong role in budget formulation. The PFA

Box 1. Japan: Main budget system laws

●The Constitution 1946, as amended (www.kantei.go.jp/foreign/constitution_and_ government/frame_01.html).

●The Public Finance Act 1947, as amended (www.mof.go.jp/english/budget/ brief/2002/2002-35.htm).

●The Diet Act 1947, as amended (www.sangiin.go.jp/eng/law/diet/index.htm).

●The Public Accounts Act 1947, as amended.

●The Board of Audit Act 1947, as amended (www.jbaudit.go.jp/engl/law/ index.htm).

●The Local Autonomy Act 1947, as amended; the Local Finance Act 1948, as amended; the Local Tax Act 1950, as amended; the Local Allocation Transfer Act 1950, as amended; and various Transfer Tax Acts (including the Local Road Transfer Tax Act 1955, as amended).

Source: Laws are available on the Internet sites maintained by the Cabinet Office, the Ministry of Finance, the Diet, and the Board of Audit respectively. See also http://homepage2.nifty.com/ paper/lawcollection.htm for part of the laws in English.

IV. JAPAN

contains the general principles of the budgeting and accounting system, including budget preparation and execution procedures in the Ministry of Finance and line ministries. The PFA is complemented by guidelines for budget formulation issued by the Cabinet. These guidelines set out: 1) basic principles, 2) ceilings of expenditure requests for the whole budget including public investment, discretionary expenditures and non-discretionary expenditures for the coming fiscal year, and 3) detailed procedures for budget preparation. The Public Accounts Act 1947 specifies the principles consolidating national treasury funds and the technical procedures for keeping accounts in line ministries. Line ministries are required by law to pay their revenues into the national treasury funds and are prohibited from using their revenues for other purposes.

The Diet Act prescribes parliamentary budget processes: the composition of the Budget Committee which is solely responsible for the review of the Cabinet’s draft budget and the reconciliation process between the Diet’s two chambers in cases of budgetary disputes. The Board of Audit Act 1947 (BOAA) governs the competence and organisation of the BOA, the coverage of audits, and the audit processes for enhancing accountability and control over the national budget. Finally, various local government acts (notably the Local Autonomy Act 1947, the Local Finance Act 1948, the Local Allocation Transfer Act 1950 and various laws for earmarking revenues) provide local governments with the power to prepare their own budgets. These and other laws specify fiscal relations across levels of government.

All budget-related laws are closely interrelated, with a view to ensuring that the national budget is formulated and implemented to achieve national objectives and policies. However, budgetary arrangements are fragmented and government accounting is complex. The law does not require the government to provide timely information on the overall stance of fiscal policy, such as a mid-year budget report. Also, extensive use has been made of supplementary budgets, in part because the budget system laws do not require fiscal policy to be formulated in a medium-term budget framework. Another distinctive feature of the legal framework is the splitting of the national budget into a general account and special accounts. In addition the budgets of some government affiliated agencies (public corporations) are included in the budget. Borrowing is included in revenues in some of the special accounts. The law does not require consolidated general government reporting on a national accounts basis and such accounts are not prepared by the government.