The Budgetary Process

Let us explain the budgetary process in Japan. Each year, the cabinet submits a budget bill to the Diet. In countries such as Japan with a parliamentary system of government, the ruling party is normally the majority party; hence, a budget developed by the cabinet is easily approved by the Diet. Consequently, the way in which the budget is developed in the cabinet is important.

In May, each ministry begins to make proposals for next year’s budget. By the end of August, each ministry must submit its budget proposals to the Ministry of Finance (MOF). Then, the MOF investigates these proposals and formulates the final budget by the end of December after negotiating with the corresponding ministries.

An examination by the Budget Bureau and negotiations between each ministry and the MOF continue for several months. The budget-making process is busy from September onward. At the same time, the government makes a projection of macroeconomic activities for the next fiscal year. Then, it determines the total ceiling for issues such as expenditure, tax reforms, and the limit of public debt issuance.

The projection of macroeconomic variables is important because this in effect determines the tax revenue estimate for the next fiscal year. If economic growth is projected to be high, the government estimates a large increase in tax revenue, resulting in a larger budget. Recently, the projection for the following year’s gross domestic product (GDP) has been too optimistic. It seems that political pressure to seek large spending results in such optimistic projections in order to make the initial budget consistent with fiscal consolidation targets. When the size of the budget is determined, money is allocated among each ministry.

In early December, the cabinet adopts the “Basic Principles of Budget Formulation.” This articulates the basic principles of the upcoming budget. In accordance with the principles, the “Proposal of the Budget Bill by the MOF” is presented, usually in mid-December. Final negotiations between each ministry and the MOF are then held based on the MOF’s proposal. In response to the final negotiations, the final budget bill is approved by the cabinet, usually at the end of December.

The cabinet submits the bill to the Diet, usually in the latter half of January. The House of Representatives (the Lower House) must discuss the bill before the House of Councilors (the Upper House), in accordance with the Constitution. If the two Houses decide on different versions of the budget, a joint committee of the two Houses is convened. If the House of Councilors cannot make a decision on the budget within 30 days of receiving the bill from the Lower House, the bill passed in the House of Representatives becomes the decision taken by the Diet. This is called the automatic enactment of the budget.

If the initial budget bill is not approved by the beginning of April, the cabinet proposes a provisional budget. This bill includes the minimum administration costs, such as salaries for civil servants. The provisional budget is absorbed into the initial budget after the initial budget bill has been approved. The cabinet can modify the initial budget during the fiscal year.

If the budget is approved but some additional expenditure then becomes necessary because of an unexpected natural disaster or negative macroeconomic shock, for example, the government creates a supplementary budget to add new expenditure and/or revise the budget’s content to cope with the unexpected detrimental event. Any supplementary budget proposed by the cabinet has to be approved in the Diet.

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