Statement by the Prime Minister following the
Cabinet Decision on the Budget for FY2002

Reflecting the Basic Policies and Improving Transparency in Budget Formulation
The work to formulate the budget for FY2002 was advanced on a platform of the gBasic Policies for Macroeconomic Management and Structural Reform of the Japanese Economyh (so-called gBasic Policies,h decided by the Cabinet on June 26), which stipulated the overall framework of the Koizumi reforms based on the spirit of gno growth without reforms.h

Subsequently, based on these Basic Policies, guidelines for budget requests were compiled and with the cooperation of the ministers concerned, discussions were made in the Council on Economic and Fiscal Policy (CEFP) in order to materialize these Basic Policies. As a result, at the beginning of December the Guidelines for Formulation of the Budget, which incorporated these policies, were decided, becoming specific principles for the budget formulation.

In the CEFP, deliberations were undertaken on the framework of the budget as a whole, its relation to the economy, and the modalities for expenditure in a number of individual fields, such as medical care, public investment and local finances. The content of these discussions was made public through press conferences following CEFP meetings and through up-loading summaries of these meetings onto the homepage. In this way we have made efforts to make clear to the people exactly what were the points of focus and what were major arguments in these meetings.

Promotion of Structural Reform and Prevention of Deflation Making Active Use of the Supplementary Budget
Prior to the FY2002 budget, the first and second supplementary budgets for FY2001 were compiled. In the first supplementary budget for FY2001, efforts were made to prepare measures to enhance the safety nets, including those for employment and small and medium sized enterprises. Subsequently, given the sudden changes in the economic environment in the wake of the terrorist attacks in the United States, in order to further accelerate structural reforms while avoiding falling into a deflationary spiral, the second supplementary budget was compiled containing Public Investments for Promoting Reform. By doing this, without contradicting the necessity of responding to economic fluctuations boldly and with flexibility, the flow of structural reforms has been carried forward into the FY2002 budget.

Drastic Revision of Expenditure and Prioritized Distribution
In the FY2002 budget, by using the aim of keeping government bond issuance under 30 trillion yen as leverage to improve the efficiency of expenditures, drastic revision to expenditure and prioritized distribution were undertaken. Under a principle of greducing expenditures by 5 trillion yen while allocating 2 trillion yen in new funds to priority areas,h various reforms such as regulatory reform, reform of special public institutions and reform of the medical care system were linked.

Specifically, public investment and Official Development Assistance were reduced by 10%, expenditure on special public institutions was reduced by over 1 trillion yen, the medical treatment fee was reduced, the scale of local fiscal plans was cut back and revenues earmarked for road improvement revised. On the other hand, the following areas that are directly related to the daily lives of the people and are also necessary to heighten the competitiveness of Japanfs economy were given priority in the budget distribution:

• Response measures to environmental issues such as the construction of a recycling economy and society through control of the production of waste and promotion of recycling;
• Response measures to the declining birth-rate and aging society, with such measures as a strategy to reduce the number of children on waiting lists for nursery schools and a plan to create a structure to provide for daycare for children during after-school hours;
• Urban development and unique approaches to the revitalization of local communities with a focus on local initiatives;
• Urban renaissance through the active use of private finance initiatives (PFI) in the development of public facilities and the elimination of traffic congestion;
• Promotion of science and technology through such means as a concentration of resources in four priority areas such as life sciences, aiming to realize a science and technology-based nation;
• Promotion of human development, education and culture through the realization of world-class universities; and
• Achievement of the goal of becoming the worldfs most advanced IT nation, through the promotion of e-government and e-local government.

Conclusion
In this way, the budget for FY2002 has been able to make a dynamic step in the promotion of fiscal structural reform. However, the degree of dependence on government bonds has risen due to reductions in tax revenues because of the slowing of the economy since the terrorist attacks in the United States.

The journey along the road to structural reform has only just begun. During a period of concentrated adjustment over approximately the next two years, although efforts will be made to minimize the pain of reforms, it will be inevitable that severe circumstances will have to be withstood. Future fiscal conditions are in no way optimistic, and we need to advance reforms on fiscal expenditures toward a simple and efficient government while reviewing relations between benefits and burdens, in order for the current fiscal structure to change into a sustainable one.

In overcoming these challenges it is necessary to open up the outlook for the Japanese economy and fiscal situation. Together with exploiting the vitality of the private sector, the Japanese economy is expected to regain its dynamism. It will be no longer allowed to postpone solutions to issues, fearing the pain in front of our eyes. The Koizumi Cabinet, together with the people of Japan, will continue unflinchingly along this path.