Economic Reform Policy by Envoy Dodge (Dodge Line)/Statement of Dodge on the Japanese Budget

by the Public Information Office, General Headquarters of the Far East Command

INFORMATION BULLETIN:

JOHOBU NEWS SERVICE

GENERAL HEADQUARTERS
FAR EAST COMMAND
Public Information Office

IMMEDIATE RELEASE:

15 April 1949

The following statement on the Japanese budget was made public today by the Honorable Joseph M. Dodge, Financial Adviser to the Supreme Commander:

Introduction

Every element of the budget problem can be discussed and amplified almost indefinitely in any direction. It is not my intention to do this but to make comments on its more important aspects which will suggest appropriate analyses and conclusions. I already have observed keen interpretations of the economic implications of the budget in the press.

General Comment

The creation and implementation of a balanced budget is the first requirement of the Nine Point Stabilization Program. As such it is the unqualified obligation of every political party and every individual. It should have been made an integral part of each party platform. It is a Japanese national problem, not a political party problem. It is essential to establishing a sound foundation for further economic reconstruction and the effective use of U.S. appropriations made for the benefit of the Japanese economy.

The stabilization program requires of the Japanese government what the former Allies of the United States, who are receiving its aid, have agreed to do in formal contracts with the U.S. government.

There seems to be astonishingly little comprehension among the Japanese people of the real situation of their country. Nothing should have been expected as the result of the war but a long term of hardship and self-denial. The nation continuously has been living beyond its means. There has been a general disposition in the Japanese government to accede to any demand to spend more and more and to attempt to spend every source of income more than once. Too much of this spending has not been put to productive use.

Any measurement of the direct and indirect losses resulting from the war will clear show that Japan cannot afford to dissipate capital. It has suffered severe physical loss and damage and economic and financial dislocations. It haas lost its empire and with that has lost great investments and sources of raw materials, production and trade. Also there has been a loss of the influences that empire brought to bear on other contiguous trading areas. Japan's population has been increased by repatriation and concentrated to its homeland. There is a large net gain in population each year. These are serious problems. Their effects reach everywhere and they cannot be quickly or easily overcome.

Any realistic view of the economic problem suggests a rough and rocky road which will severely test the strength, character and loyalty of the people. The economy has travelled the early part of this road in a damaged and unrepaired vehicle but the vehicle and the passengers have been protected from road shocks by a cushion of U.S. aid. It is time the Japanese began to face up to the unalterable facts of their own life and organize themselves to meet their own problems and regain their independence by their own efforts.

A better perspective of the problems of the present situation can be achieved if they are properly related to what the conditions might have been without the benefit of U.S. aid or might become when this aid has to be reduced or withdrawn.

It will require the active and continuous support of every individual in meeting its national problems for this country to regain an independent status in world affairs. U.S. aid only can serve as a stimulant to the efforts of the Japanese people to find the way to develop a self supporting economy as a result of their own labors.

3. IMMEDIATE RELEASE (Jabors.)

There is no place where inflation takes over quicker and moves faster than in a shortage economy. Productivity is decreased and not increased by government spending. It should be remembered that a government can neither spend nor give away except what it first acquires from someone. Governments only spend other people's money. Wealth must be created before it can be divided.

The Japanese people should demand a balanced bedget and should then direct their attention to the elimination of excessive expenditures, wastefulness, subsidies, over employment and the general dependence on government instead of individual or group accomplishment. It is these which must be revised to produced later tax reductions.

The Government Budget

The government budget is the financial structure within which the government conducts its business. It is the window through which the people should clearly see what the government intends to do, how it will operate and what its impact on the people and the economy will be in the coming fiscal year.

Heretofe, the budget has not adequately served this purpose. The two principal reasons for this are that the facts have not been made clear by the form of the budget itself and that the discussion and publicity has always centered around only one part of the budget, the general accounts. Another important part of the government operations is represented in the special accounts, which have been largely ignored.

These two parts are closely interrelated. One part could show a balance or even surplus and the other show even a greater deficit. One could show a small deficit and the other add to this much larger deficit. Combined, as they should be, in a consolidated budget the real facts of the government financial position and intentions are shown and in this way part of the window is cleared.

This fiscal year's budget is intended to accomplish a balance of all government accounts. It discards the practice of encouraging and permitting the people to believe the situation is different than it is by emphasizing merely the result given in the general accounts of the government which is only part of the story of what the government is doing with public funds.

The Japanese government budget system is inadequate, both in its mechanism and the time elements allowed for preparing a budget. It has been completely ineffective as an instrument of administrative control. It is neither clear nor understandable. It has not shown all of the current government obligation. The record of the past shows that is has had little meaning. It has been a record of budget delays, provisional budgets, supplementary budgets and deficits.

The 1948 Deficit Record

In 10 months of the last fiscal year the government debt increased 178 billion. At the end of the fiscal year the government had an unfunded deficit of about 48 billion. A large part of this increase in debt was nothing more than a funded deficit. Any combination or adjustment of these figures indicates an actual deficit of more than 150 billion for fiscal year 1948.

The Overall Budget

The total figures of the consolidated budget will appear large for several reasons, First because it is a consolidated budget. Second, because it is on a higher indlation level than existed a year ago. Third, because there are so many elements appearing in the budget for the first time, which had previously been obscured in other accounts. Fourth, because the bedget computation includes many inter-account transfers, viz., amounts appearing on the disbursement side of account and the revenue side of another.

7. IMMEDIATE RELEASE (of another.)

The total of the publicly reported budget is about one hundred per cent greater than the actual budget transactions. The general accounts represent only about one-sixth of the reported total budget. The tax revenues represent only about one-eight of the total reported revenues. The remainder comes from other special and general account revenues.

The Japanese press reports a total budget in excess of 4 trillion yen. This figure includes approximately 400 billion yen for local government budgets which are independent of the national budget. The 3.6 trillion yen national budget is further reduced to about 2 trillion yen by accounting transfers and necessary temporary borrowing to finance current transactions. The budget is balanced in consolidated form at an actual level of about 2 trillion yen.

In the most general terms the normal increase in expected tax revenues at the existing rates due to inflationary increases, and the limitation of expenditure expansion has been set aside to absorb heretofore concealed subsidies, to create the Counterpart Fund representing U.S. aid, to absorb the unfunded deficit and other losses in government accounts and to retire a portion of the existing government debt.

The actual total of approximately two trillion for the consolidated budget compared to any estimate of the national income shows that an appalling proportion of the total national business is represented by government transactions viz: transactions which [were] processed through government instead of private channels. Some estimates indicate this is as much as two-thirds.

6. IMMEDIATE RELEASE 15.4.49 (two-thirds.)

The Government Revenues

The larger estimated tax revenues of the government in this year's budget have been generally referred to as "tax increases". This is inaccurate. The tax revenues in the present budget are at the already existing tax rates applied to a higher level of income and prices. This is one of the products of inflation.

The attainment of the revenue objective under the taxes set forth in the budget is essential to meet the expenditures provided for in the budget.

The tax rates themselves are high but the effective collection under the rate are low. There is a real need for greater equity in tax administration. But no tax rate will be equitable or effective until each individual is willing and is required to pay his proper share of the tax burden. Modification of the existing tax rates can be justified only when the people wholeheartedly do their part in meeting their tax liability.

The administrative requirement is to insure that every individual pays his full legal tax debt. The honest tax payer should not be penalized by being forced to carry the load of the tax evaders. The profits of the tax evaders and the black market operators should be the first and most vigrously attacked.

Tax reduction must be predicated on an assured revenue under whatever rate is established. Taxes cannot be reduced in face of a record of progressively greater government spending. They can only be reduced as a result of progressively less government spending. After accomplishment, not before.

7. IMMEDIATE RELEASE 15.4.49 (before.)

Emphasis todate has been on a maximum of government expenditures instead of on a minimum. Under these conditions there can be no other result than an increased tax burden.

In insisting on the removal of the deficit-financing the most vicious type of general taxation has been eliminated. Actually, everyone has been paying two types of taxes. One type is composed of legal taxes, the other is the indirects taxation reflected by uncontrolled and continuous government deficit financing.

The Government Expenditures

Government expenditures remain high. Planned expenditures are all shown for the first time. Subsidies are revealed for the first time. Where there is concern about the level of taxation the level of expenditure should also be noted. It is government expenditures that determines tax requirements.

There has generally been no "slashing" of expenditures. Most expenditures actually are higher than last year. The saving on expenditures has been primarily in restricting their further expansion. The reductions are from extremely high original estimates of proposed expenditures, which were inappropriate to the general financial means available. This is an accomplishment only in that it modifies past practice. There is still much to be done and much that can be done to reduce expenditures.

The Government Subsidies

Since the end of the war large amounts of U.S. goods have gone into the foreign trade account but this fund shows no balance because the imported goods have been sold at so much less than cost. This process has obscured subsidies from the view of the public.

8. IMMEDIATE RELEASE 15.4.49 (public)

One leg of the "stilts" has been built from subsidies. These have been hidden in the transactions of the foreign trade account and have not been clearly shown in the budget. Actually they are government grants to particular producers, or consumers, from the government tax revenues collected from all of the people and from the proceeds of the U.S. aid furnished Japan. Now these actions will be made clear and grants of tax money to reduce prices of special goods or products to consumers will be seen.

Subsidies are exposed in the budget so as to clearly place the responsibility for their use in the Japanese government and to ensure that appropriate action will be taken to reduce and finally eliminate them. They represent a large amount, seen for the first time. But the amount is actually much less than it would have been had the practice of last year been fully extended to the wage and price levels of this year. The amount does embody a substantial reduction. It should be progressively eliminated.

This practice of the general use of subsidies is abnormal and undesirable. It creates fictious and unnatural price relationships. Also it is more costly than the mere figures indicate. The amount collected in taxes for subsidies is first reduced by the other administrative costs of the government and the operating costs of every Koban or government departmet handling the transaction until the remainder is actually applied to a consumer price of food, material or product. Thus the consumer taxpayer inevitably receives back only part of what he pays out for this purpose. Bu the taxes are paid by all of the people and except for subsidies granted to hold down the price of basic foods consumed by all the people, the tax proceeds going into subsidies are distributed for the benefit and protection of special groups of people.

9. IMMEDIATE RELEASE 15.4.49 (people.)

Something can be said in favor of certain price increases perhaps costing the consumer less than some taxes are now costing him. Too much of the price of too many materials and products is collected by the Tax Bureau of the government instead of in the market.

Whatever these subsidies may be, and whatever the amount of them may be considered necessary, they should and must be paid from tax revenues and not from the proceeds of the U.S. aid. By the transfer of these subsidies from the foreign trade account and making them a charge to government revenues it has been possible to set up the Counterpart Fun as the equivalent of U.S. aid imports.

10. IMMEDIATE RELEASE 15.4.49 (U.S. aid imports.)

The Counterpart Fund

The Counterpart Fund sets up in the budget for the first time the estimated amount of U.S. aid which may be received during the coming fiscal year. The use of this fund will be under the control of SCAP. It is a powerful fiscal instrument for helping meet the future trends of the economy. Its use will be closely supervised and follow the general principles of similar U.S. aid funds elsewhere but related to the particular conditions of this economy. Its principal uses will be for the retirement of government debt and for capital investment purposes which contribute directly and quickly to economic reconstruction. It will not be a political grab bag. In considering released from the Counterpart Fund for investment projects great weight will be given to the progress made in achieving the tax goals set forth in the dudget, how the budget expenditures are being administered, and the fulfilment of the terms of the Nine-Point Stabilization Program.

Credit Policy

The balanced consolidate budget for the 1949 fiscal year together with the Counterpart Fund provide instruments with which the Government operations may be carried on without contributing to an inflationary expansion of the money supply. These also supply the means through which the legitimate requirements of industry for working capital and equipment funds may be set without an inflationary impact. The effect of this is closely related to credit policy. Investment expenditures from the Counterpart Fund will offset in advance by collections from the proceeds of imports. However, through the investment funds and the retirement of RE? and other government debt provided for in the budget and through the Counterpart Fund substantial means have been created for meeting the needs for extending sound and proper credit and for essential capital investment purposes.