The budget framework for the next fiscal year is decided in August!

There are various reasons why companies, NGOs, and others engage in public affairs activities, but one of the most common reasons is to obtain a “budget.” This may mean seeking grants that support creative activities in local communities, support from the government in terms of encouraging behavior change by companies or people, or other ways of essentially requesting the government to provide some kind of fiscal support.

The month of August, when the rest of the world is on summer vacation, is a very busy time for the government, especially for those involved in various ministries and agencies, as it is a very important point in the compilation of this budget. I would like to take this opportunity to summarize some of the key points to keep in mind about the Japanese government’s budget preparation process.

Rules followed by ministries and agencies

The budget process involves each ministry and agency submitting a rough estimate of the budget required for the policy areas for which it is responsible to the Ministry of Finance (MOF), which is the budget compilation agency, and the MOF in turn examines the estimates.

Each ministry submits its estimate to the MOF by the end of August each year. Items that are not included in this request will not be included in the next year’s budget, so if you want to do something in the next year’s budget, you need to move before the deadline at the end of August (although in reality, it is too late to start moving in August; we will discuss when you should start moving later on).

The MOF issues rules for each ministry and agency to follow in late July, one month prior to the annual budget request. The MOF, which does not want to be faced with a skyrocketing balance of requests from various ministries, indicates in advance that it will not accept requests unless they are made in accordance with these standards, and then binds each ministry by obtaining approval at a Cabinet meeting where all ministers from all ministries are present. In the case of this year, the Cabinet approved the budget request criteria for the FY2024 budget compilation on July 25. (See the figure below).

Source: Ministry of Finance website, July 25, 2023 cabinet approval for the FY 2024 budget estimates.

It may not be easy for those who are not government officials to understand what this chart is talking about. To explain a bit more, there are several types or “frameworks” that make up the budget that is the eventual target of the estimated requests. Of these, it is worth bearing in mind that there are “mandatory budgets” that cannot be arbitrarily cut or increased, such as those required by law; “discretionary budgets” that can be requested at the discretion of the ministry or agency as its own initiative; and “priority policy promotion quota” that tends to be prioritized and budgeted as important policies.

Getting into the details now, in the budget request criteria, ministry officials are concerned about how much money can be put aside for the “priority policy promotion quota” and how much “discretionary expenses” must be reduced. This year, there are exceptional items (not capped at this time) such as the defense budget and the budget for children’s measures, but “local government allocation subsidy,” “pension and medical care,” and “mandatory expenses” are not things that can be managed by themselves at the budget request stage, and for many ministry officials end up having to include the budget request for the policies they want to implement in the “priority policy promotion quota” and “discretionary budgets.”

However, as you can see from the chart above, the “priority policy promotion quota” and “discretionary expenses” are handled in the exact opposite manner. If a request is placed in the “priority policy promotion framework,” the budget is secured in a special quota and the request can be easily approved, but if a request is not included in this framework and is instead made under “discretionary expenses,” each ministry and agency is required to reduce its budget by 10% from the previous fiscal year. So, what is the “priority policy promotion framework” and how can items be included in it?

The explanation of the “Priority Policy Promotion Quota” in the budget request guidelines reads as follows.

The “Priority Policy Promotion Framework” will be established for important policies based on the “2023 Basic Policy on Economic and Fiscal Management and Reform” and the “Revised 2023 Grand Design and Action Plan for a New Form of Capitalism” in order to address important policy issues such as the realization of structural wage increases, expansion of investment through public-private partnerships, acceleration of new capitalism including measures for declining birthrate and drastically strengthening child-related policy, and response to changes in Japan’s environment including the drastic enhancement of defense capabilities.

The “2023 Basic Policy on Economic and Fiscal Management and Reform” is the official name for what is known colloquially as the “Basic Policy” (in Japanese, “honebuto no hoshin,” literally, “big-boned policy,”) while the “Revised 2023 Grand Design and Action Plan for a New Form of Capitalism” refers to the so-called “Growth Strategy” plan, but in short this means that policies positioned in either of those documents can receive financial benefit from the “priority policy promotion quota.”
This may be an indication that each ministry and agency will emphasize the importance of including policies in the Basic Policy and Growth Strategy, which are approved by the Cabinet in June.

When should public affairs activities start in order to obtain a budget?

Now, looking towards the August budget requests, the criteria for budget request are announced on July 25, and whether or not the request will be included in the priority policy promotion quota depends on whether or not it is positioned in the Basic Policy in June. The most important question for those who are engaged in public affairs activities then is, “When should we start? Below, we would like to consider this point while briefly reviewing the process until the government’s annual budget is decided. The timing shown below varies slightly from ministry to ministry, and should be understood only as a flow of events.

From January on:
Each ministry and agency considers the policies that should be included in the Basic Policy and the Growth Strategy. The policy coordination departments of each ministry and agency request each department to consider the policies, and each department may also talk to related industry associations and individual companies.

From April on:
At this time, there is a rough idea of the items that are to be included in the Basic Policy and the Growth Strategy. Based on this assumption, ministries and agencies begin to consider what policies, including those that will not be included in the policy, and at what amount, will be requested in the next fiscal year’s budget request. Each department compiles a draft and discusses it with the budget compilation department of the ministry or agency. Here, too, discussion may occur with relevant industry associations and individual companies.

Mid-June:
Cabinet approves Basic Policy and Growth Strategy.

Late June to early July:
Ministry and agency’s executive level personnel transfers take place, and it is common for the budget request consideration that has been taking place since April to have taken some shape by the time of these personnel changes. Those in charge of the budget work with the understanding that it is their job to get it done to that point.

End of July:
Cabinet approval of the “Budget Request Criteria” (See above.)

July – August:
As is customary, each ministry is required to obtain approval for its budget estimates for the next fiscal year at a meeting of the relevant LDP subcommittee meeting, and each ministry goes around explaining its budget estimates to key members of the ruling party in advance to ensure approval at that meeting. However, industry associations that are dissatisfied with the contents of the budget estimates compiled by the ministries may go ahead and input their dissatisfaction to the legislators, asking them to urge the ministries to reconsider when they come to explain the budget estimates. In some cases, the request is submitted to the ministry in the form of a written budget request by sympathetic legislators and others.

End of August:
Each ministry submits its budget request estimates to the MOF.

September – December:
Each ministry and agency explains its budget estimates to the MOF. The first explanation takes place in September, and is followed by numerous exchanges between the ministries and the MOF, as necessary, during the MOF’s assessment phase.

End of December:
In early December, the Cabinet makes a preliminary decision on the “Basic Policy for Budget Compilation,” and later in the month, the Cabinet officially approves the government’s budget proposal. At the very end, to reach a final decision on the last pending issues, the ministers of various ministries and the Minister of Finance will negotiate directly with each other to reach a final conclusion.
In addition, prior to the Cabinet approval, similarly to as in July and August, ministries and agencies are required to explain the status of coordination with the Ministry of Finance to the relevant LDP subcommittees, and the Diet members sometimes press them to make adjustments to budget items that are likely to be cut in the assessment process.

January – March:
Following deliberations in the Diet, the budget is usually formulated in March. Since the House of Representatives is given precedence over the House of Councillors with regard to the budget, if the House of Councillors does not pass a resolution within 30 days after receiving a budget bill approved by the House of Representatives, the budget approved by the House of Representatives will be automatically enacted. Therefore, if the House of Representatives passes the budget in February, it will be enacted in March.

This is a brief overview of the process for the initial budget to be approved. At any rate, if the budget is not included in the request at the end of August, it will not be included no matter how hard you try after that. In addition, even if you bring it to the Ministry in July or August, at that point the budget will have already been solidified within the Ministry. Therefore, it is necessary for a company (or NGO, etc.) to first make a proposal at the beginning of the year in order for it to be included in the Basic Policy, etc., and if that is not possible, the company should be ready to participate in the discussion of the next year’s budget proposal around April.

We hope that the above information will be helpful to readers in their public affairs activities regarding the government’s budget.

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Yuzuru Tachi
Executive Officer / Head, Makaira Public Affairs