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IV. JAPAN

4. Legal provisions for each stage of the budget cycle

4.1. Budget preparation and presentation by the executive

4.1.1. Institutional coverage of the budget

The PFA applies to the national budget (Art. 1), which is divided into a general account and special accounts (Art. 13), and the budgets of government affiliated agencies. The national budget covers all ministries, commissions, agencies, and some public corporations. The national budget is submitted to the Diet in the form of the general account, 31 special accounts (as of April 2004) and the budgets of nine government affiliated agencies.6 All ministries are included in the general account, but only some ministries are authorised to establish special accounts and government affiliated agencies. Local governments’ budgets are excluded from the application of the PFA – they are governed by the LFA as amended.

4.1.2. Extrabudgetary funds and earmarking of revenues

The budget is fragmented because of the multiplicity of special accounts and government affiliated agencies (Ministry of Finance, 2004, p. 3). Special accounts can be established only by legislation (Art. 13, PFA). The government has initiated the creation of special accounts to carry out specific projects, to administer and manage specific funds, or to administer revenues and expenditures separately from the general account. All special accounts are submitted to the Diet for parliamentary review and expenditures can not be appropriated without the Diet’s authorisation. Each special account generally has its own distinct source of revenues; some accounts can finance imbalances by borrowing or receiving funds from the general account. The government’s loan programme is managed through one of the special accounts – the Fiscal Loan Fund Special Account, which is a main part of Fiscal Investment and Loan Programme (FILP). National pension and health care services have operated as special accounts (for example, National Pension Special Account, Labour Insurance Special Account).

A number of government affiliated agencies have been established under special laws. Whereas the central government provides subsidies to these agencies, which are fully capitalised, the budgets for most of them are not subject to the Diet’s approval. However, nine agencies (seven public financial corporations and two banks), 7 which are closely linked to overall government policies, have their budgets approved by the Diet. Since most of these agencies are not institutional units within “general government” – as defined by the GFS manual of the International Monetary Fund (IMF, 2001b) – they cannot be regarded as extrabudgetary funds. Rather they are quasi-fiscal activities, where the government uses enterprises – either financial or non-financial – for fiscal policy purposes. These enterprises are under the surveillance of line

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ministries. By law, the budget and financial plan of each government corporation is required to be approved by the Finance Minister as well as by the responsible minister.

4.1.3. Definition of budget aggregates

The law does not provide a definition of the various budget aggregates. For the general account, the guidelines for budget requests clearly define, and establish ceilings for, the bulk of the total expenditure for the next year. The difficulty in defining “government” revolves around the extensive use of special accounts, some of which are outside the general government sector.

4.1.4. Fiscal rules

Up until 1975, a version of the golden rule, which limited borrowing to construction bonds issued to finance investment spending, had worked strictly. Thereafter, this was replaced by renewable laws that allowed the government to issue special deficit-financing bonds in addition to construction bonds. The FSRA set a medium-term fiscal target for reducing the government deficit, but this law was suspended in 1998. In 2003, the government’s revised reform and perspective programme aimed at maintaining general government expenditures at no more than the level in FY2002 (about 39% of GDP) and achieving a primary budget surplus by the early 2010s. Although this rule is not legally binding, it has substantial force in the Cabinet, which makes the important decisions for the annual budget.

4.1.5. The timetable for budget preparation and presentation to Parliament

The Constitution only requires Cabinet to prepare and submit a draft budget to the Diet. The PFA specifies that the draft budget is to be submitted to the Diet by the Cabinet during January of the current fiscal year (Art. 27). Most of the provisions for the timetable for the budget process (Box 4) are set out in the PFA, guidelines or regulations.

The Prime Minister and other ministers submit the initial estimates of revenues and expenditures (so-called “budget requests”) to the Minister of Finance. The government Ordinance for Budget, Settlement and Accounting requires budget requests to be submitted by the end of August (seven months before the next fiscal year beginning on 1st April) (Art. 8). Prior to this, ceilings are proposed by the Finance Ministry in consultation with the Prime Minister and the Cabinet Office. The CEFP discusses the content of the guidelines in detail and sends them to line ministries after the Cabinet authorises them.8 The PFA requires the Minister of Finance to co-ordinate budget requests by line ministries, and to prepare the budget proposal to be approved by the

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Box 4. Japan: The timetable for the budget process

1st April: a new fiscal year starts.

April to August: preparation of budget requests by line ministries.

July to August: examination of the guidelines for budget requests by the CEPF and issuance of them by Cabinet.

End of August: submission of budget requests by line ministries to the Ministry of Finance.

September to December: scrutiny of line ministries’ budget requests and bilateral discussions with the Ministry of Finance, in order to prepare the draft budget proposal for Cabinet approval.

Beginning of December: issuance of the guidelines for budget formulation prepared by the Ministry of Finance and approved by the Cabinet.

Mid-December: presentation of the budget proposal by the Ministry of Finance to the Cabinet. Final negotiations between Finance Minister and each line minister to settle remaining disputes, usually on politically important matters.

Late December: approval of the budget proposal by the Cabinet.

Early January: submission of the budget proposal to the Diet.

March: approval of the budget by the Diet.

Source: Ministry of Finance, 2004.

Cabinet (Art. 18) usually in December. Thereafter, budget documents are prepared by the Minister of Finance and submitted to the Diet by the Cabinet in January based on a Cabinet decision (Arts. 21 and 27).

4.1.6. Approval process within the executive

Unlike in most countries, where budget approval within the executive is determined by internal rules, the law (the PFA) contains a few key provisions relating to Cabinet approval of the budget. Around the beginning of December, Cabinet issues the “General Principles of Budget Formulation” and the Ministry of Finance completes the draft budget in accordance with the PFA requirements. Negotiations take place between the Ministry of Finance and relevant line ministries. After reconciliation, the draft budget is officially approved by the Cabinet at the end of December. The PFA requires the Cabinet to submit the draft budget and additional documents to the Diet during January of the current fiscal year (Art. 27).

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4.1.7. Documents to accompany the budget law

The PFA specifies five areas which must be covered in the budget to be submitted to the Diet (Art. 16). Other articles of the PFA elaborate on these five areas, notably:

General provisions. There is an emphasis on comprehensiveness, including the provision of ceilings on public bonds as well as on Treasury bills, temporary borrowings, and other liabilities to be borne by the Treasury; the range of expenses for public works; and other matters necessary for budget implementation (Art. 22).

The revenue and expenditure budget. Estimates are drawn up in the executive according to the binding procedures of the PFA. Detailed revenue and expenditure estimates must be annexed to the budget.

Continuing expenditures. The expenditures for which there is an exception to the single-year budget principle are stated to include construction and manufacturing (Art. 14bis). The same article limits continuing budget authority to a maximum of five years. Both the scope and duration of such expenditures is subject to the Diet resolution.

An approved expenditure to be carried over to the following fiscal year.

This arises where the appropriation is not likely to be spent within the fiscal year concerned due to its nature or any reasons after the budget is approved, subject to the Diet resolution (Art. 14ter).

Future liabilities that could be borne by Treasury (contract authorisation).

This system allows the government to make contracts for projects in which it is necessary to incur a liability within a given fiscal year and make all or part of the outlays in subsequent years. The draft budget must contain an amount for such contracts (Art. 15). The government is required to get advance approval from the Diet for possible future disbursements.

Medium-term macroeconomic framework and fiscal strategy. Although the budget is formulated under the single-year budget principle stipulated by the PFA (Art. 14) and no law requires the presentation of a medium-term budget framework, the government has developed medium-term fiscal planning for providing the basis for economic and fiscal policy decisions in the government. The Ministry of Finance usually releases a “Medium-Term Fiscal Projection” at the end of January when the session in the Diet begins. The Cabinet Office also prepares medium-term scenarios, based on a macroeconomic model. Such projections provide the Diet with information on the medium-term fiscal implications of current budget policies, although it does not place firm ceilings on total or specific categories of main expenditures for the following years.

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New measures versus existing expenditure policies. The PFA does not require a distinction to be made between new measures and existing expenditure programmes of the draft budget. However, in practice, the above-mentioned medium-term projections of the Ministry of Finance are on the basis of unchanged policies,9 whereas those of the Cabinet Office include some policy changes such as structural reforms.

Performance-related information. The Government Policy Evaluations Act 2001 requires line ministries to provide some information on evaluation when they submit their budget request to the Ministry of Finance. Although a lot of information on evaluation is released by each ministry through the year and the overall evaluation report by the Ministry of Public Management is tabled in the Diet, such information is not included in the budget documentation. Nonetheless, the Diet may use performance-related information for making budget decisions.

Tax expenditures, contingent liabilities and fiscal risks. No law requires the government to include a statement of tax expenditures and major fiscal risks in the budget. Nonetheless, the Ministry of Finance usually provides a report on tax expenditures to the Budget Committee of the Diet. The report states how much revenue is reduced by each specific tax expenditure for several years, including the budget year.

Government guarantees are required to be approved by the Diet. Accordingly, detailed information of each contract for government guarantees and indemnities are included in the budget documents. Furthermore, the amounts of obligations and dissolutions (flows) and carryover to the following years (stocks) of each guarantee are reported in the “Statement of Liabilities of the State” and submitted to the Diet with the final annual accounts.

Other information required by law. The PFA requires a considerable amount of supplementary information to accompany the budget (Art. 28), including for corporations under government control (Box 5). In practice, the profit and loss accounts and balance sheets of the 62 largest public enterprises are submitted to the Diet for information.

4.1.8. Budgets of Parliament and other constitutional bodies

Constitutional organisations, notably the two chambers of the Diet, the Supreme Court (and the Board of Audit) prepare their budget estimates differently from line ministries. The PFA provides a special process for these constitutional organisations, giving them the authority to prepare their budget estimates and submit them directly to Cabinet with the Cabinet coordinating all budget proposals (Art. 17).10 The PFA requires the Minister of Finance to make the necessary adjustment on the estimated amount proposed by constitutional organisations subject to the Cabinet decision

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