IV. JAPAN

budget but also the final budget (the cap focused only on the initial budget, whereas expenditure increased significantly through the adoption of supplementary budgets). Unless the act puts strict constraints on expenditure, credibility is undermined.

In recent years, the government has introduced some broad government reforms, which have had significant effects on public finance management. In 2001, the leadership of the Prime Minister and Cabinet was enhanced, with the creation of the Cabinet Office and the Council on Economic and Fiscal Policy. The primary aim of the council is to research and deliberate on important matters of economic and fiscal policy, such as overall economic management, fiscal policy management and budget formulation, including the drafting of the outline of the national budget, formerly the exclusive job of the Ministry of Finance (see section 3.1.3 below). Important steps have been taken to improve the transparency and accountability of government policies. In May 1999, the Diet enacted the law concerning access to information held by administrative organisations, which enables individuals to request the ministries and agencies concerned to disclose their information on public finance management. The Government Policy Evaluation Act 2001 was introduced to evaluate the policies of each ministry and agency, which moves Japan towards the early stages of performance management.

2. Principles underlying budget system laws

Japan has incorporated some traditional budget principles into its legal framework for the budget. However, the modern principles of transparency and performance have not been formally embodied in the budget system laws in a formal manner, apart from general statements in the Constitution and PFA. In particular, the Constitution requires the Diet’s prior authorisation of taxation and expenditure of public funds by the executive. The Constitution also specifies the principle of accountability (Art. 90), by requiring final accounts of expenditure and revenues of the government to be audited annually by the BOA, which determines whether public funds were spent in accordance with the laws and regulations concerned. The executive is also accountable for their fiscal activities to the Diet. The Diet reviews whether the budget was executed in line with their intentions, and approves the final fiscal accounts audited by the BOA (Art. 90).

The Constitution, complemented by the PFA, states the principle of the annual budget. The Constitution requires that the draft budget be prepared for each fiscal year (Art. 86), which begins on 1st April and ends on 31 March of the next year (Art. 11, PFA). Budget estimates are provided for a 12-month period. The annual budget is approved prior to the year to which it refers. All transactions are estimated for their one-year effect. An exception to the

IV. JAPAN

principle arises when the government needs to make payment for projects. In this case, the Diet can approve multi-annual amounts for projects (Art. 14bis, PFA).

The principles of unity and universality play an important role in the budget process. The PFA requires all revenues and expenditures to be incorporated into the annual budget (the principle of universality, Art. 14). However, the principle of unity is not fully respected in that three separate budgets (general account, special accounts, and government affiliated agencies), not in the same document, are submitted to the Diet for its approval. Although revenues and expenditures are consolidated, the overall budget balance on a national accounts basis is not shown.

The principle of specificity, which requires revenues and expenditures to be shown in some detail in the budget documents, is embodied in the PFA (Art. 23). The revenue and expenditure budgets are required to be classified according to ministries or agencies concerned. Within that, revenue is categorised by the nature of the revenue whereas expenditure is classified by its purpose.

The principle of a balanced budget, embodied in the PFA, requires that budget expenditures are balanced by budget revenues and financing: “expenditures of each fiscal year should be met by the revenue of the same fiscal year” (Art. 12). The PFA defines the revenue as received funds that serve as the source of payment to meet the demand arising from various levels of the government. Expenditure is defined as disbursed funds to meet the demand arising at various levels of the government in a given fiscal year (Art. 2). Although the PFA requires expenditures to be appropriated within the current year’s revenues inclusive of borrowing for public works expenditures (Art. 4), as noted above, special laws overriding this principle have been enacted.

Finally, while there are many respects in which fiscal transparency meets international standards (IMF, 2001a), including the rich amount of information that is presented to the Diet and the public, there is still room for progress in key areas. For instance, the government does not provide the Diet with consolidated data for the general account, the special accounts and the budgets of government affiliated agencies. Nor does it provide consolidated budget information for the central government, local government and the social security system in the draft budget.