3 June 1997
Cabinet decision

The following fiscal structural reforms have been decided in accordance with the Promotive Measures for Fiscal Structural Reform of the Conference on Fiscal Structural Reform, and shall be promoted steadily and resolutely.

1. The environment surrounding the Japanese public finance has undergone a great transformation marked by a decreasing birth rate and an increasing population of the elderly, the collapse of the Cold War structure, the end of the "catch-up" phase of econ omicdevelopment, the advent of an era of mega-competition, a decrease in the working-age population and other changes. Amid these changes, the fiscal situation in Japan has reac hed a more critical state than that of any of the other major industrialized nations.

Under such conditions, in order to open the path toward a brighter 21st century characterized by a more efficient and reliable administration, a more stable and affluent welfare society, and a more healthy and vibrant economy, Japan must urgently and without delay implement fiscal structural reform and achieve fiscal consolidation, while promoting economic structural reform.

To this end, the Cabinet has decided, as an interim target under the five principles of fiscal structural reform recently presented by the Prime Minister, to aim to achieve the fiscal consolidation target (bringing down the national and local fiscal-deficit-to-GDP ratio to 3% or less; eliminating the issuance of special deficit-financing bonds) by FY2003. The Cabinet has also decided to designate the three remaining fiscal years of this century as an "intensive reform period" to promote spending reforms and cutbacks while allowing no sacred areas. These shall be promoted resolutely.

In particular, to ensure that general expenditure, (discretionary expenditures) in the FY1998 budget is lower than it was in FY1997, the targets for quantitative reductions in the principal areas of expenditure as concluded by the Conference on Fiscal Structural Reform will be reflected at the stage of budget requests for FY1998.

In addition, efforts will be made to further curb spending depending on the progress in reduction of the fiscal deficit.

2. In implementing fiscal structural reform, it is necessary not only to improve the balance of revenues and expenditures, but to review the fiscal structure itself. This demands bold reforms based on such ideas as the review of the division of government and private-sector roles and national and local government roles; the realization of equitable benefits and burdens; the creation of economic vitality; and the efficient allocation of fiscal resources.

To ensure that these fiscal structural reforms gain the understanding and support of the Japanese people, it is also necessary to actively promote disclosure of information related to the general account, special accounts and other fiscal matters.

>From this viewpoint, fiscal structural reform must not only encompass reductions in spending from the general account, but also review and reform of special accounts, as well as reforms from a wide perspective, including:

(a) reform of public corporations from such perspectives as the degree of achievement of policy goals and review of government and private-sector roles;

(b) review of fiscal investment and loan program aimed at streamlining these, i.e., private sector complementary and full redemption certainty;

(c) establishment of a fair tax system endorsed by the taxpayers, which is able to respond to structural changes in the economic and social structure;

(d) promotion of decentralization that enhances the autonomy and independence of local governments; and

(e) constant reexamination of various projects in response to changes in economic and social conditions.

Discussions are currently proceeding on these wide-ranging reforms. It is absolutely necessary to reform and reduce expenditure during the intensive reform period and to implement these reforms resolutely as part of the broader tide of reform.

3. Based on this thinking, the following concrete measures and policies for reform and reduction of expenditure have been decided. In accordance with this decision, the utmost effort will be devoted to the building of a sound fiscal structure, including the resolute execution of necessary structural reforms.

Report

1. Social security

Social security spending is expected to rise inevitably with the aging of the population structure, but the amount equivalent to this natural rise will be greatly reduced during the intensive reform period. In concrete terms, the increased expenditure due to a rise in unit prices accompanying wage and price increases will be absorbed through structural reforms and other measures to boost efficiency, thus making it possible to restrain growth in overall social security expenditure to a level lower than its inevitable increase (approximately 2 percent of the total) stemming from the aging of the population structure.

In particular, based on the aim of below-zero growth in general expenditure in comparison with FY1997, the increase of over 800 billion yen, which is projected under the current policy basis for FY1998 will be greatly restrained in the FY1998 budget through cutbacks of over 500 billion yen.

In addition, to implement the above ideas, social security structural reform will be promoted and, in line with the burden distribution goals stipulated in the five principles of fiscal structural reform, the following reforms will be steadily put into place while keeping the Japanese people adequately informed on the process, with the aim of building a social security system that can be managed in a stable way even at the peak of the aging process.

(1) The basic policy of ensuring that increases in national medical care expenditure do not exceed growth in national income will be firmly maintained and sweeping reforms in both the medical care system and the health insurance system will be carried out in a comprehensive and step-by-step manner.

FY1997 reforms in the medical insurance system will be realized immediately as the first step in these sweeping structural reforms.

The following specific measures will be carried out during the intensive reform period, and initiated to the greatest extent possible from FY1998.

(a) A thorough review will be conducted on the system of standards on pharmaceutical prices, i.e., the elimination of price differentials, elimination of the current system and adoption of a new system based on market transaction principles.

(b) An optimal combination of piecemeal and flat-rate payments will be established for medical examination and treatment, with active utilization of flat-rate payments by the chronically ill.

(c) Sweeping reform of the health care system will be undertaken for the elderly with a view to improving the economic situation of the elderly and with a view to fair cost sharing among different generations and social solidarity (mutual support).

(d) Systems for the provision of medical care will be streamlined by reducing the number of students in university medical departments, looking toward the reorganization and rationalization of these departments, and by keeping down the number of individuals who pass the national medical examinations. The overall number of hospital beds will be reduced, taking account of regional disparities, thereby improving the environment for medical treatment. The functions of medical institutions will be divided and shared to create a flow that enables patients to obtain treatment at the most suitable institution when necessary.

(e) The structure of insurance groups in national health insurance, government-managed health insurance, society-managed health insurance and other items will be reviewed with a view to strengthening policyholder functions and stabilizing system management.

(f) The standardization of medical costs at fixed rates will be implemented across the board, while giving a certain amount of consideration to the elderly and others, from the perspective of equity between benefits and costs.

Patient costs will be reviewed with a view to equity between patients treated at home and those treated at hospitals and how they will be tied into the pension system, while giving a certain amount of consideration to low-income patients.

(g) National hospitals and sanitariums will be reviewed, including the elimination and privatization of facilities.

(2) If premiums remain at current levels, pension finances would only be able to cover about 60 percent of total future benefits.

It is thus necessary to build a pension system which the Japanese people can continue to rely on. To this end, immediate in-depth discussion will be initiated among the Japanese people and, when finances are recalculated in FY1999, sweeping systemic reform, including proper adjustment of benefits and costs, will be undertaken, also bearing in mind equity among different generations and employment for the elderly. In carrying out these reforms:

(a) To curb the premiums to be borne by future generations, the benefits for high-income earners, benefits for facility residents, modification of the sliding-scale method, and pensions for the working elderly will each be considered. At the same time, efforts will be made to review the applicable age for benefits and the level of those benefits.

(b) The current system of progressive premiums, which is passing on costs to future generations, will be reviewed and the cost levels among different generations will be made more equitable. At the same time, a system of premiums on total salary will be introduced and premiums set accordingly in order to make costs within the same generation more equitable.

(c) The supplemental resolution to the 1994 revision states that consideration will be given to lifting of the state-subsidized portion of basic pensions while ensuring the necessary revenues can be secured. Reflecting the severe fiscal situation at present, this will not be considered again until the goal of fiscal reconstruction is achieved. (d) As a response to the increased mobility of the labor force and in order to promote self-help efforts, company pensions and private pensions will be developed.

(3) Administrative costs related to social insurance will be reviewed, further reduced and rationalized.

(4) Pensions and medical benefits for the elderly with incomes above a certain level will be reviewed to the extent that such a review does not contradict the principle of insurance.

(5) In the area of welfare, efforts will be made to pass the bill of insurance for long-term care and, while maintaining the quality of welfare services, various regulations will be lifted, information on the content of services will be disclosed and the entry of private firms into welfare service areas will be promoted. At the same time, facility development costs and management cost subsidies will be reviewed.

(6) As for the employment insurance system, benefits for elderly job seekers will go through a drastic review, including the elimination of them, based on consistency with other policies. At the same time, the state subsidies for unemployment benefits will be reviewed based on the principle of self-responsibility. The Employment Insurance Law will be reformed in 1998 to carry out such reviews.

In addition, the employment welfare projects of three employment insurance projects will be reviewed, i.e., no new construction of housing for transferred workers or of welfare facilities.

2. Public investment

(1) The fundamental thinking behind the Basic Plan for Public Investment will be maintained. This plan aims to improve social overhead capital as a whole by the early part of the 21st century which can must be secured so as to pass on the burden to the future generations as Japan is approaching a highly aged society.

However, given Japan's critical fiscal situation, there is a need to aim to lower public investment spending during the period of intensified reform. It should be reduced to a level commensurate with the national economy's level prior to the start of the substantial supplementary expenditures, which were implemented to stimulate economic recovery. To this end, the duration of the Basic Plan for Public Investment will be extended by three years and, over the initial 10-year term, the scale of the plan's investments will be reduced from 600 trillion yen to about 470 trillion yen. In addition, the content of the plan will be revised based on changes which have occurred since the plan's drafting.

(2) Long-term public works programs will be reviewed as follows.

(a) Housing program, including public sector participation, will be reviewed to reflect future housing policy, based on changes in the conditions under the plan on which housing was originally based and the aims of fiscal structural reform.

(b) Road improvement and slope failure prevention program, which are scheduled to be completed at the end of FY1997, will be appropriately revised based on the five principles of fiscal structural reform and with consideration to substantial reductions in the Basic Plan for Public Investment.

(c) Other long-term programs will be maintained in line with the basic idea behind the establishment of those programs while, based on the aims of fiscal structural reform, time-frame of the plan will be extended four years in the case of the 10-year land improvement program and two years in the case of other plans. Thus, it will enable substantial reductions in the size of those investments. In extending the term of these programs, their content will also be reviewed, including prioritizing and streamlining projects, as necessary.

(3) Construction costs for public works will be reduced through immediate implementation of measures based on the Action Guidelines on Measures to Reduce Public Works Costs (which aim to reduce costs by no less than 10 percent over the three-year period beginning in FY1997 through implementation of various measures). At the same time, the utmost effort will be made to secure the volume of public works even while the public investment budget is being curbed. In addition, active efforts will be made to prevent illegal acts and to make tendering procedures openly competitive in order to create fair pricing through fair competition.

(4) The interim public works budget will be based on the following idea in order to address the need to immediately implement economic structural reform to maintain the economic vitality of Japan; to promote the appropriate division of roles between government and private sector and between the central and local governments; and to make project implementation efficient and effective.

(a) Social overhead capital that is closely linked with the lives of residents will be steadily implemented in the future. In the process, nationally subsidized projects will be reduced and the criteria for adoption will be raised in order to promote efficient construction based on the needs of local governments by entrusting those governments to make their own decisions based on an appropriate division of roles between central and local governments. National support will be limited to cross-regional projects; projects necessary for ensuring minimum national standards; projects related to national projects; and other similar projects.

(b) In allocating the public works budget during the intensive reform period, social overhead capital relevant to economic structural reform (high-standard trunk roads and other social overhead capital related, hub airports, key harbors, and urban development, etc.) will be enhanced, with priority on projects that contribute to greater efficiency in distribution.

(c) Based on the idea of the Basic Plan for Public Investment, which aims to realize a society and economy in which people can truly enjoy a better quality of life, priority will continue to be placed on social overhead capital relevant to people's lives, which has lagged behind in comparison with other areas. In doing so, priority will be given to investment areas that ensure a certain standard of living and to areas and regions which are truly behind in the development of such social overhead capital.

In addition to considering local economies, there is also a need to promote balanced development across the nation and to correct regional disparities.

(d) Under the initial FY1998 budget, in order to promote economic structural reform through better efficiency in distribution, high-standard trunk roads and other social overhead capital related, hub airports, key harbors, and urban centers will be improved with special measures being established and comprehensively coordinated with a focus on linkage between projects and project nature.

In compiling the FY1998 budget, the government will establish a basic direction for concrete allocations and coordinate with the Conference on Fiscal Structural Reform to prioritize allocations.

(e) In implementing the various projects, consideration will be given to the following points:
(i) regional promotion and the development of safe regions;
(ii) projects that attract private-sector demand;
(iii) projects that contribute to advancing telecommunications and promoting research and development;
(iv) enhancement of the environment and welfare;
(v) comprehensive promotion through coordination and consistency among various projects;
(vi) utilization of cost-benefit analysis to promote efficiency and the strengthening of monitoring functions; and
(vii) ensuring transparency through appropriate disclosure of information, and other measures.

In addition, priority will be given to ongoing projects, while restraints will be placed on the implementation of new projects, especially large-scale projects.

(5) The public investment budget will be decreased each fiscal year during the intensive reform period, based on the above idea.

In particular, the public investment budget in FY1998 will not exceed an amount equivalent to a seven percent decrease from the FY1997 budget, based on the aim of below-zero growth in general expenditure in comparison with FY1997.

(6) Comprehensive consideration will be given to tax revenue earmarked for road works, given the critical fiscal situation and the basis of beneficiary-pays systems. This will include revision of the conventional handling of vehicle-weight tax revenues during the intensive reform period, including the allocation of an amount of equivalent to 80 percent of the national revenue to the other social infrastructure related to roads, while asking the Japanese people to continue paying an appropriate tax, as the public investment budget as a whole is curbed.

3. Educational budget

The educational budget will be restrained by conducting a complete review, covering the following items in relation to compulsory education, national schools and support for private tuition, in order to streamline in response to the decrease in the number of children and students; enforcing the beneficiary-pays principle; and dividing roles and costs between central and local governments.

(1) Implementation of the Sixth Improvement Plan on Teaching Staff Deployment at Public Compulsory Education Schools and the Fifth Improvement Plan on Class Organization and Teaching Staff Deployment at Public High Schools will be restrained during the intensive reform period and the duration of the plans, originally through the end of FY1998, will be extended two years.

In prefectures where the decrease in staffing levels exceeds the number of retirees, appropriate adjustments will be made. (2) The organization of national school structures, including procedures for their establishment, will be immediately reviewed and, during the intensive reform period, transfers from the special account for national schools will be kept no higher than in the previous fiscal year. This will be achieved by reviewing class fees, integrating university administrative structures, reducing the number of positions, and strictly enforcing the scrap-and-build policy.

In particular, the FY1998 budget will be drastically curbed with the aim of below-zero growth in general expenditure in comparison with FY1997.

(3) Given the future drop in the number of children and students, subsidies for private educational institutions will be severely curbed during the intensive reform period by holding operating fee subsidies for current expenditures at or below the level of the previous year. At the same time, methods of allocation will be reviewed, including greater priority on support for unique education and research projects.

In particular, the FY1998 budget will be strictly curbed based on the aim of below-zero growth in general expenditure in comparison with FY1997.

4. Defense

There is a need to develop a moderate defense capability with a view to the security of the nation and also because of domestic economic and fiscal circumstances. It is especially necessary to exercise restraint because of the urgent need for fiscal structural reform in response to the current critical fiscal situation. Therefore, the following measures will be implemented.

(1) The 25.15 trillion yen Midterm Defense Build-up Plan will be reviewed this year in order to restrain defense-related spending over the next three years. This review will include a cutback of 920 billion yen, equivalent to 10 percent of equipment costs for the remainder of the plan, and will be implemented within the year.

(2) Defense-related expenditure during the intensive reform period will be held to no more than that during the previous fiscal year.

Defense-related expenditure in FY1998 will be held to no more than that in FY1997 through efforts to cut all expenses, including personnel and provisions, current-year obligatory outlay and current-year equipment.

(3) Efforts will be made to rationalize and boost the efficiency of equipment procurement and supply systems, in order to reform acquisitions including reduction in procurement costs.

5. Official development assistance (ODA)

(1) The ODA budget will be decreased each fiscal year during the intensive reform period through a shift in emphasis from quantity to quality, reflecting the internationally conspicuous increase in the volume of Japan's ODA, on the one hand, and the critical fiscal situation in Japan, on the other.

In particular, the ODA budget in FY1998 will not exceed an amount equivalent to a 10-percent reduction from the FY1997 budget.

(2) New medium-term target which entail quantitative targets will not be established.

(3) Aid will be implemented with an emphasis on preliminary consultations with the recipient countries and fully considering the importance of social development, including support for health, medical care, education and the improved status of women, in an effort to ensure aid is truly appreciated by the peoples of the recipient countries. In addition, an evaluation system will be set in place; cooperation with NGOs and other private-sectors will be promoted; and the disclosure of information will be enforced.

6. Agriculture, forestry and fisheries

The agriculture, forestry and fisheries budget will be further prioritized and streamlined in response to the critical fiscal situation; at the same time, measures will be focused on core producers, and further market principles and conditions for competition will be introduced.

(1) The duration of measures concerning the agreement on agriculture under the Uruguay Round, especially in the area of agricultural and rural development projects, will be extended for two years with a view to fiscal structural reform. The content of these projects (amounting to 6.01 trillion yen) will be reviewed based on an inspection of past projects, in order to make contributions by establishing agricultural management responsive to the new international environment and by making the most of unique regional characteristics. The project budget will be revised to establish a ratio of approximately 50-50 between agricultural and rural development projects and other projects.

(2) In regard to the Staple Food Expenditure, taking into account the spirit of the Staple Food Law, the level of government rice reserves will be adjusted appropriately at an early stage, and prices of agricultural products, rice included, will be adequately determined.

The government, while maintaining responsibility for the appropriate operation of reserves, will review the subsidies for privately-distributed rice and the payments to farmers for rice production adjustments from the viewpoint of utilizing market principles, will review the discounts on rice for school lunches in the direction of abolishment, and will continue to keep the Staple Food Expenditure no more than that in the previous fiscal year during the intensive reform period.

(3) Other budgets related to agriculture, forestry and fisheries will be completely reviewed overall, including the Co-operated Agricultural Extension Service Grants, in line with the direction toward concrete review of subsidies as a whole.

(4) Efforts will be made to fundamentally reform the management and organization of National Forests focusing on future discussion on Administrative Reform, while sustaining public welfare functions of forests such as the conservation of environments. Based on these reforms and the Five Fiscal Structural Reform Principles, broad consideration will be given to the following:

* fiscal measures for forest improvement;
* policies for handling accumulated debt; and
* ways of cost-sharing, including tax revenues, matched to the benefits obtained from forests.

7. JNR Settlement Corp. debt

In order to achieve fiscal structural reform, it is essential to engage fully in settling debt, which now amounts to 28 trillion yen.

Current examination within the ruling party has thus far produced the following policy alternatives:

* debt repayment through independent sources of revenue;
* advanced redemption of Fiscal Investment and Loan Program or reduction/elimination of interest;
* issuance of interest-free government bonds with certain benefits, i.e., reduced inheritance tax;
* bold review of government expenditure as a whole;
* cost-sharing by all transport system users;
* cost-sharing by JR;
* cost-sharing by JR users in the form of a tax for railway use, etc.;
* use of road revenue sources, such as the gasoline tax;
* putting the agency debt under the general account; and
* public cost-sharing through higher taxes.

In order to avoid simply passing on the costs to future generations and to obtain the understanding and support of the Japanese people, all policy alternatives, including those above, will be individually and carefully examined while disclosing information and analyzing the factors behind the increase in debt, and "a definite plan will be formulated in 1997" (Cabinet decision of 25 December 1996).

8. New shinkansen lines

The government committee examining the establishment of new shinkansen lines will make a strict decision on how to handle the situation upon full and rigorous confirmation of forecasted profits, JR loan coverage, the agreement of local governments on the division of management of parallel existing lines and agreement from JR. Hasty conclusions concerning the establishment of new lines must not be reached.

It is essential to ensure that this examination be carried out in such a way that the understanding of the Japanese people can be obtained, i.e., methods of calculation, basic data on profitability and the opinions of concerned local governments and JR must be appropriately disclosed.

In addition, the start of construction on new sections must be carried out in a way that does not interfere with the planned intensive period of fiscal structural reform.

9. Science and technology budget

(1) The following measures will be taken with respect to large projects such as those on atomic power, nuclear fusion and space development.

(a) During the intensive reform period, new projects will not be started, i.e., Japan will not seek to bring the International Thermonuclear Experimental Reactor (ITER) plan to Japan.

(b) Current projects in which there are problems, i.e., the Monju fast-breeder reactor, will be completely reviewed.

(2) National testing and research institutes, special corporations and other national research facilities, except those duly designated as national centers, will be abolished or merged. During the intensive reform period, a plan will be formulated to achieve this, and the budgets of national research institutes and systems will be reduced by eliminating duplication, prioritizing and increasing efficiency.

(3) The allocation of funds will be prioritized and made more efficient by implementing external evaluations at preliminary, midterm and post-facto stages; publishing evaluation results; and reflecting those results in the allocation of research funds.

(4) Given the above, during the intensive reform period, increases in the budget for the promotion of science and technology will be greatly restrained, with consideration given to a balance with other expenditures.

In FY1998, the budget for the promotion of science and technology will be increased by no more than approximately 5 percent, based on the aim of below-zero growth in general expenditure in comparison with FY1997.

(5) In implementing the Basic Plan for Science and Technology, expenditure related to atomic power, space development and defense will be restrained as much as possible. At the same time, the plan will be handled flexibly, taking into account the critical fiscal situation, and in a manner consistent with the fiscal structural reform budget.

10. Energy

(1) Given the critical fiscal situation, during the intensive reform period, the budget for energy measures will be held to no more than that of the previous year in order to promote spending reforms and reductions, without allowing any exceptions.

The FY1998 budget, in particular, will be boldly restrained considering the goal of below-zero growth in general expenditure relative to FY1997.

(2) To this end, transfers to the special account for coal, petroleum and sophisticating energy supply and demand structure, which account for the majority of the energy spending, will be reduced through reviewing all expenditures of the account, bearing in mind the importance of maintaining stable medium- to long-term measures, including new forms of energy and energy conservation measures, without simply relying on the special revenue source system.

(3) The organization and structure of the Power Reactor and Nuclear Fuel Development Corporation will be fundamentally reformed and its operations will be thoroughly reviewed in order to cut spending.

(4) Overall spending from the special account for measures to promote electric power development will be reviewed, while making measures to establish and diversify electric power sources more efficient.

Non-fiscal measures such as the disclosure of information and environmental assessment will be extremely important in establishing electric power sources.

11. Small and medium enterprise measures

(1) Given the critical fiscal situation, the budget for SME-related measures will be held to no more than that of the previous year during the intensive reform period in order to promote spending reforms and reductions, without allowing any exceptions.

In particular, the FY1998 budget will be boldly restrained, considering the goal of below-zero growth in general expenditure relative to that of FY1997.

(2) Overall spending for SME measures, including subsidies for the personnel costs of prefectural chambers of commerce, will be reviewed from the viewpoint of respecting SME vitality and the role of local governments, in line with the direction toward the concrete review of subsidies as a whole.

12. Local government finance

(1) The reduction of local government fiscal deficits requires reform of the fiscal structure, characterized by a dependence on special loans to make up for the shortage of revenue, and cuts in local government costs through the promotion of decentralization and autonomy, as well as the review of measures toward spending curbs at both national and local government levels.

Local government fiscal deficits will be lowered by reducing the borrowing through the Special Account for the Allotment of Local Allocation Tax and Transfer Tax and local construction bonds additionally issued for the revenue shortfall during the period in which fiscal consolidation target is being pursued, thereby successfully reducing the national and local government deficit to no more than 3 percent of GDP.

Thereafter, efforts will be made to quickly reduce large debts, including the borrowing through the Special Account for the Allotment of Local Allocation Tax and Transfer Tax and the local construction bonds additionally issued for the revenue shortfall.

In addition, the scale of local bond issues will be restrained.

(2) As noted above, in order to reduce local government fiscal deficits and promote fiscal structural reform at the local government level, in formulating the Local Public Finance Program, the growth rate in local government general expenditure in the Local Public Finance Program during the period when fiscal consolidation target is being pursued will be curbed in line with the national growth rate, and will be kept at no more than the nominal growth rate, with the review of national measures toward the restraint of both national and local government expenditure, as well as the restraint of measures under the jurisdiction of the local government alone. In this process, the fact that local government finance is an aggregate of 3,300 local governments will be taken into account, and autonomy and decentralization will also be kept in mind.

In particular, the FY1998 Local Public Finance Program will aim to reduce local general expenditure from the previous year through strict restraints on spending, with local government expenditures curbed as the national government will make the general expenditure lower than it was in FY1997, and Investment Capital expenditures under the jurisdiction of the local government alone decreased in comparison with the previous year.

(3) Given restraints on expenditures under the jurisdiction of the local government alone in the Local Public Finance Program, measures to promote spending curbs in each local government will be taken when calculating Local Allocation Tax and the allocation of local bonds.

Furthermore, from the perspective of promoting independent efforts toward fiscal consolidation by local governments, there will be an examination of the Local Allocation Tax system and local bond system, as well as of independent methods of revenue procurement by local public organizations, based on the discussions of the Committee for the Promotion of Decentralization.

(4) In order to achieve local fiscal consolidation, local governments need to promote in-depth administrative and fiscal reform with a strong sense of their importance. From this perspective, while considering the promotion of local autonomy and decentralization, local governments will be requested to implement in-depth administrative and fiscal reforms, including the correction of salaries and number of positions; a review of administrative activities; the commissioning of tasks to the private sector; the streamlining and reduction of affiliated organizations; the reduction of public works costs; and the curbing of public facility construction. (Projects mainly consisted of building and other hardware construction.)

(5) In promoting local autonomy and decentralization, the administrative structures of local governments need to be strengthened themselves at the same time. From this perspective, there is a need to implement effective measures for the consolidation of cities, towns and villages and to support the consolidation actively during the intensive reform period.

13. Subsidies

(1) Rationalization of subsidies

Subsidies (including shares, grants, support funds and commissions) will be reviewed without allowing exemption, in view of changes that have taken place in socioeconomic conditions, as well as the allocation of government and private sector roles and of central and local government roles.

In addition, government ministries and agencies will take necessary actions such as releasing a summary of decisions to provide subsidies within their jurisdiction reflecting its purpose, recipient and other conditions, in order to ensure transparency in subsidy-granting.

(2) Subsidies for local public organizations

Subsidies for local public organizations will be divided into "institutional subsidies" (provisional title) and other subsidies, and these will be cut back and rationalized.

(a) Institutional subsidies will be reduced and rationalized by reviewing actual existing measures and projects, including system revisions.

Those considered as institutional subsidies are outlined below. These will be stipulated with comprehensive consideration on the legal basis for the subsidy.

(i) Subsidies mainly related to national interest, such as national governance/stability and handling external relations (i.e., costs for holding national elections, costs for commissioning foreign registration procedures)
(ii) Subsidies for securing the basic rights of the Japanese people under the Constitution (i.e., subsidies for livelihood protection costs, national subsidies for compulsory education costs)
(iii) Subsidies for disaster relief and recovery (i.e., subsidies for costs related to disaster relief)
(iv) Subsidies for matters to undergo individual and comprehensive review, including system revision (i.e., public works related expenditures)

(b) Other subsidies will be reduced by 10 percent for each ministry and agency in each fiscal year during the intensive reform period.

(c) In reducing and rationalizing the subsidies in (a) and (b) above, the following measures will be taken.

(i) Subsidies related to personnel costs will, except for special subsidies for specific regions, be taking necessary actions such as being incorporated under general revenue of local governments.
(ii) Subsidies related to the costs for local government administrative procedures which are assimilated/established or standardized will be taking necessary actions such as being put under general revenue of local governments.
(iii) As for subsidies for meeting halls and other public facilities, there will be no construction of new facilities, in principle, during the intensive reform period.

(3) Subsidies for special corporations and chartered corporate entities

Subsidies for special corporations and chartered corporate entities will be reduced and rationalized through a thorough review of each corporation's activities, including the elimination of those which have lost social significance.

Subsidies for corporations related to public races will be reviewed, including the enhancement of transparency.

(4) Subsidies for business organizations

Subsidies such as legally-based subsidies for public corporations, business organizations, etc. will be reduced and rationalized through a review of existing measures and projects, including system revisions. Other subsidies will be reduced by 10 percent for each ministry and agency in each fiscal year during the intensive reform period.

In this process, subsidies for the activities of public corporations will be reviewed in terms of corporate role and management, thereby limiting the subsidies to those that are truly necessary and making bold reductions.

(5) Curbing new subsidies

(a) New subsidies will be strictly curbed. They will only be established when it is truly necessary to meet changes in administrative demands and, in such cases, the number and amount of these subsidies must be set according to the scrap-and-build principle.
(b) New subsidies will have a five-year sunset clause and, in principle, will not be renewed at the end of that period.

(6) Small-scale subsidies not to be adopted

Criteria for the adoption of each subsidy will be set according to a comparison of subsidy benefits and costs, and those which are not efficient will not be adopted.

(7) Integration, itemization and simplification of administrative procedures

Based on studies by the Decentralization Promotion Committee, subsidies will continue to be integrated, itemized and turned into grants, while administrative procedures concerning grant decision and the conversion of subsidized assets will be simplified and rationalized.

14. Permanent staff and personnel costs

Total personnel costs will be restrained as much as possible through the implementation of appropriate measures during the intensive reform period.

(1) Efforts will be made to restrain further the number of permanent staff, including a review of the permanent staff reductions plan, while ascertaining the arguments related to the review of national administration/activities.

In FY1998, government ministries and agencies will tighten the control on increasing personnel and will strengthen the implementation of the permanent staff reductions plan.

(2) With respect to the wages of civil servants, the National Personnel Authority's recommendation system(a compensatory scheme related to basic labor rights(will be maintained and observed.

However, if changes should arise in the situation, those concerned will consider the circumstances of government as a whole, engage in responsible debate and make the appropriate response.

(3) Annual spending for both houses of the Diet and Diet members must be examined immediately under the supervision of the speakers of both houses, taking into consideration the current fiscal situation.

15. Other

(1) Expenditures other than those for which numerical targets were established above will be strictly restrained, i.e., will not exceed the level for the previous fiscal year during the intensive reform period.

(2) The establishment of facilities by the national government will be strictly restrained through the necessary reviews, i.e., refraining from new construction of large facilities (Prime Minister's new official residences, etc.) during the intensive reform period.

(3) Projects related to the measures to promote the Okinawan economy and the Special Action Committee on Okinawa (SACO) will steadily be implemented.

(4) It is proposed that the issue of capital functions relocation be carefully examined, giving comprehensive consideration to the background of the issue and to the fact that painful reforms are being conducted in all areas related to fiscal structural reform. The method of budget requests will be thoroughly reviewed, and each ministry and agency will make requests based on the aforementioned concrete measures for the reform and reduction of spending. In making requests, measures and policies will be carefully selected and prioritized while implementing the necessary system reforms, making utmost efforts to streamline and increase the efficiency of spending given the limited revenues.
In accordance with the above principles, the Prime Minister will direct a basic policy related to budget requests and notification of details will be disclosed by the Minister of Finance.

In order to implement concrete spending reforms and reductions, those which should be legalized will be carefully examined. Based on the results, all the necessary procedures for formulating legislative bills for fiscal structural reform will be completed so that they can be submitted to the Diet at the earliest possible date.