MEMO FOR RECORD: (SCAPIN - 1093)
WKL/JEW/hyy
12 July 1946
1. The Special Account Budgets of the Imperial Japanese Government for the fiscal year 1 April 1946 through 31 March 1947, now before SCAP for approval, fall into the following categories:
a. Government enterprises and monopolies (Communications Enterprise, Imperial Railways, Monopoly Bureau, etc.)
b. Fiscal Accounts set up for administrative convenience (Gold Fund, local allocation tax, national debt consolidation, etc.)
c. Miscellaneous accounts (universities, school fund)
2. These accounts represent a substantial portion of the total expenditures of the governments, amounting to about ¥41 billion, as compared to the ¥55 billion program provided for in the General Account Budget. The total operating revenues of the Special Accounts are estimated at approximately ¥42 billion. It should be noted however, that since each of the accounts operates independently of each other, comparison of total revenues to expenditures is misleading. Actually, certain accounts, primarily the Imperial Railways, Communications Enterprise, and Foodstuff Control, will incur deficits amounting to about ¥8.1 billion, of which approximately ¥4.2 will be financed by public loan, ¥2.5 by appropriation from the General Account, and ¥1.4 billion by a proposed, but not yet approved, increase in railroad fares. On the other hand, certain other accounts, primarily the Monopoly Bureau (from sale of tobacco), and the Life & Welfare Insurance Accounts, will have a total surplus amounting to about ¥9 billion.
3. It has been the practice to present the Special Account Budget to the Diet separately from the General Budget. This is considered highly undesirable since it prevents the Diet from being able to consider the governmental expenditure program as one entity. The consideration of these budgets jointly is particularly important in the case of those Accounts that receive an appropriation from the General Budget.
4. The Special Accounts Budgets are in general unsatisfactory. The methods and procedures employed in preparing the estimates are generally fallacious. The breakdown and justification of the estimates are so broad and incomplete, when not actually misleading, as to be in most cases meaningless for the purpose of review, examination, and budget accounting. In addition, the present budget and accounting system provides almost no means of checking actual expenditures against budgeted items except on a broad basis. In view of this, as well as for reasons indicated in Paragraph 3 above, it is recommended that SCAP:
a. Permit the Special Accounts Budgets to be presented to the Diet, subject to certain limitations, without the specific approval of SCAP. Staff Sections of SCAP are supervising the actual activities taking place under these accounts and consequently will be able to limit and revise them later.
b. Direct the Imperial Japanese Government to revise their budget and accounting methods in accordance with recognized principles in order to implement their own administrative and legislative control over the governmental expenditure programs, as well as providing SCAP with the information necessary for proper review and examination.
5. A brief analysis of each of the budgets submitted is given below, taking up each of the accounts under their respective categories:
a. Government enterprises and monopolies.
(1) Communications Enterprises. The budget for this account, showing the estimated revenues and expenditures of the Post Office, as well as the telephone, telegraph, and other communications facilities operated under the Board of Communications, reflects an anticipated deficit of ¥867 million which is to be financed by public loan. This deficit, however, is not being incurred as a result of the operating expenses of the enterprise, but rather to meet the urgent need for capital reconstruction and restoration of facilities. In general, the projected activities for this enterprise seem satisfactory. The construction program has been carefully planned by the Board of Communications under the close supervision of CCS, and will be coordinated with the over-all construction program through the ESB which will control the material allocations. Rate increases for the use of the facilities provided by the Communications Enterprise were effected 6 May 1946 to offset an existing operating deficit; and the effect of these revisions on the national economy is being closely observed. A brief summary of the anticipated expenditures and revenues for this account is given below.
REVENUES
(in million yen)
Operating (Sales and Services) 1,986.2
Transfer from Other Accounts (Reimbursement for Handling Expenses) 659.2
Public Loan 867.0
Miscellaneous 4.1
TOTAL 3,416.5
EXPENDITURES
(in million yen)
Operating 2,404.4
Reconstruction 942.2
Debt Amortization and Interest Charges 37.8
Reserve 31.5
TOTAL 3,415.9
(2) Imperial Railways. This budget shows an anticipated deficit of ¥2.7 billion which will be incurred as a result of expenditures for capital reconstruction and will be financed by public loans. It is also estimated that there will be a discrepancy between operating revenue and expenditures, amounting to ¥1.4 billion, which, it is planned, will be offset by upward rate revisions (200% for freight charges, and 25% for passenger fares) as of 1 October. However, inasmuch as the propriety of such flat-rate increases is questionable (expecially with reference to commodities, where the ratio of freight charges to total cost of production varies widely), there will be no changes premitted without prior consideration by SCAP as to their probable effect upon the economy as a whole. In general, the expenditure side of the budget appears satisfactory. The plan for reconstruction has been carefully developed by the Imperial Railways in accordance with recommendations of the 3rd Military Railway Service and ESS/Ind. The actual allocation and pricing of materials for this purpose, as well as the coordination with the national reconstruction program, are scheduled to be handled by the ESB. Labor expenditures seem excessive in view of the fact that the Imperial Railways employ 530,000 persons as compared to a total of slightly more than 1,000,000 employees for the entire railway network in the United States. However, in view of the existing labor surplus and the scarcity of mechanized equipment, it does not appear necessary to examine the employment policy too closely at this point (particularly since ESS/LA is continuously studying labor conditions). The Imperial Railways are permitted to subsidize local railways to the extent of ¥19 million. This amount has been transferred from the surpluses of certain local railways to the Imperial Railways account, and, in accordance with the customary practice, will be redistributed among the weaker local railways which are operating at a loss. A brief Statement of this budget has been given below:
REVENUES
(in million yen)
Operating 5,309.3
Proposed Rate Revision 1,382.9
Public Loans 2,716.0
Miscellaneous 55.0
Reserve 100.0
TOTAL 9,563.2
EXPENDITURES
(in million yen)
Operating 6,506.4
Reconstruction 2,378.9
Debt Amortization and Interest Charges 470.8
Miscellaneous 9.2
Reserve 180.0
TOTAL T, 9,545 3
(3) Monopoly Bureau. This bureau, which controls the production and sale of tobacco, cigarette paper, salt, bitters, and camphor, estimates a total excess of revenues over expenditures of ¥5.9 billion, derived chiefly from the profit on the sale of tobacco. There are ample supplies of leaf tobacco on hand (over 76 million kilograms), as well as estimated domestic production of 38 million kilograms in 1946 to achieve this, Natural Resources states, however, that a severe shortage of rayon pulp, the principal raw material utilized in the manufacture of cigarette paper, exists and that a portion of the output would have to be diverted from rayon manufacture. Consequently, in accordance with the recommendations of Natural Resources, the Monopoly Bureau has been informally advised to emphasize the use of substitute materials. The largest expenditure item contained in this budget with the exception of "purchases" is an item of ¥690 million for salt subsidization. It is estimated that this expenditure will bring the domestic production for this year up to 550,000 tons, leaving additional requirements of 871,000 tons to be covered by importation. The major objection is that, under the proposed subsidy, ¥600 million would be expended to augment "unlicensed" production (i. e. subsidiary production), resulting (a) in the increased in size of already large concerns (in opposition of SCAP policy), and (b) in the increase flow of salt outside of regular channels. Therefore, the Imperial Japanese Government is being instructed to permit only the establishment of "licensed" concerns henceforth.
REVENUES
(in million yen)
Operating (Sales) 8,809.9
Miscellaneous 7.9
TOTAL 8,817.8
EXPENDITURES
(in million yen)
Operating 2,191.9
Subsidies and Grants 708.4
Miscellaneous 31.3
Reserve 11.0
TOTAL 2,942.6
(4) Deposit Funds Management Bureau. This Bureau operates primarily as an investment bank for postal savings funds, insurance funds, and other surplus funds of governmental agencies (estimated at c. ¥65 billion for this fiscal year). Revenues are expected to exceed expenditures by ¥67 million, of which ¥40 million will be transferred to the General Account and ¥27 million added to the surplus. Generally, the budget appears satisfactory. The investment operations of this Bureau are almost entirely limited by a SCAP directive to national and local government financing. On the other hand, the Bureau is faced with a probable loss on previous foreign investments and loans to special companies which total investments are valued at ¥9.5 billion. These losses may or may not be covered by reserve funds now on hand of ¥2.5 billion. A brief statement of estimated revenues and expenditures is given below:
REVENUES
(in million yen)
Investment Profit 1,811.2
Miscellaneous 0.9
TOTAL 1,812.1
EXPENDITURES
(in million yen)
Operating 1,744.7
Transfer to General Account (for General Resources) 40.0
Miscellaneous 0.3
TOTAL 1,785.0
(5) Post Office Life Insurance and Life Annuities. This account is divided into two sub-accounts for each type of insurance. The budgets for these sub-accounts reflect a total surplus of revenue estimated at ¥1.7 billion, the disposition of which is not indicated. However, the law governing these accounts states that all unexpended revenues at the time of closing the accounts are to be accumulated as contingent reserves of the sub-accounts concerned. Representatives of the Board of Communications, under whose jurisdiction the administration of the accounts fall, state that the rates charged on the insurance, and the size of the reserve maintained, are based on actual figures. The expenditures from these accounts are limited to claims, dividends, and administrative costs with one exception; i. e., money may be expended by law from the life Insurance Sub-Account "for health promotion service entrusted to other government agencies and others of the kind." Bureau officials state that expenditures of this nature are at present confined to a small transfer (about ¥3 million) to the Welfare Ministry in exchange for the privilege granted to their policy-holders to use government medical facilities at the relatively low government rates. The management of these activities is being supervised by CCS who considers it to be reasonable.
(6) Mint Bureau and Printing Office. Both of these agencies are normal governmental agencies, necessary for the efficient operation of the government. The budgets for both of these agencies, while reasonable, are incomplete. The budget for the Special Account of Mint does not indicate how its estimated deficit of ¥52,817,227 will be financed. It is stated by Bureau officials that deficits in this account are financed by transfers from the Mint Fund which had an outstanding debt of ¥125 million as of 31 March 1946. Actually, however, the agency officials now indicate that additional revenues amounting to ¥325 million not reflected in this budget, are estimated to accrue from the sale of fifty-sen coins and will be shown in a supplementary budget, thus resulting in a surplus of revenues of the fiscal year. In the case of the Printing Office, there is a similar failure to reflect total fiscal operations, the budget reflecting a surplus of estimated revenues over expenditures amounting to ¥70 million, but not indicating its disposition.
(7) Monopoly Bureau for Alcohol. The operations of this account include manufacturing, purchasing (from private alcohol producers), and distributing of industrial alcohol. During this fiscal year it is anticipated that the output will be curtailed to approximately 45,000 kiloliters, a figure not far in excess of minium requirements, in view of raw material shortages (actually, it is doubtful whether even this production can be realized). It is further estimated that an operating deficit of approximately ¥31 million will occur. This estimate is erroneous in that the budgeted expenditures include purchases of raw materials (costing roughly ¥100 million) which will not be consumed until the next fiscal year. On the other hand, on the basis of present operations, it appears that an actual deficit will result, primarily due to the following reasons:
(a) Rather than concentrating production in the most efficient plant, several factories have been allowed to continue production at a small percentage of their actual capacity; thus resulting in higher costs, as well as prohibiting the most efficient utilization of critical raw materials.
(b) It has been practice to grant "indirect" subsidies, in the form of price concessions, to private producers. Consequently, in order to minimize unnecessary losses and waste, and in accordance with recommendations made by representatives of the Staff Sections regarding the subsidization of government monopolies, the Fuel Bureau has been advised orally to concentrate production in the more efficient plants, and is being instructed formally to eliminate "indirect" subsidization to private producers.
(8) Food Stuff Control. The budget for this account reflects the fiscal operations of the government monopoly for purchasing and marketing staple food stuffs. For this fiscal year, a direct allocation (food subsidy of ¥2,166,983,000) is required from the General Budget to cover losses sustained through price control measures. The budget is completely dependent upon the following and is not subject to manipulation:
(a) The size of the food crops.
(b) The official prices for these foodstuffs, which are closely supervised by ESS/PC.
FOODSTUFF CONTROL
REVENUES
(in million yen)
Operating (Sales) 13,489.4
Transfer from General Account (Food Subsidy) 2,167.0
Miscellaneous 0.8
TOTAL 15,657.2
EXPENDITURES
(in million yen)
Operating 657.7
Redemption of Food Certificates 14,836.0
Miscellaneous 16.3
Reserve 147.2
TOTAL 15,657.2
(9) Adjustment in the Demand and Supply of Charcoal & Firewood. This budget reflects the fiscal operation of the governmental charcoal and firewood monopoly. It is identical with the Foodstuff Control Budget except in one instance: the official prices have been fixed at levels sufficiently high as to require no governmental subsidy.
ADJUSTMENT OF DEMAND & SUPPLY OF CHARCOAL & FIREWOOD
REVENUES
(in million yen)
Operating (Sales) 3,940.7
Miscellaneous 0.1
TOTAL 3,940.8
EXPENDITURE
(in million yen)
Operating (Purchase, Handling) 3,938.7
Miscellaneous 0.3
Reserve 1.8
TOTAL 3,940.8
(10) Special Account of Welfare Insurance and Special Account of Insurance Liability Relief to Injured Workers. The budgets submitted by the Welfare Ministry are believed to represent a fair estimate of revenues and expenditures under the existing statutes, provided that taxable payrolls and the rate of benefit payments, during the fiscal year, are in the neighborhood of the figures assumed by the Ministry. While the budget may be accepted for immediate working purposes, it should be recognized that changes in wage and price levels, not now foreseen, are likely to occur. In addition, it is expected that GHQ, SCAP will issue instructions to the Imperial Japanese Government in the near future which may result in major changes in (a) the method of collecting contributions, (b) the allocation of revenues among the various social insurance programs, and (c) the schedules of benefit payments and fees for medical services. The budget should be reviewed and revised at that time, but this is not attempted now because details of the proposed changes remain to be worked out.
(11) Agriculture and Livestock Reinsurance, Forest Fire Reinsurance, and Fishing Boat Reinsurance. The purpose of these accounts is to diversify the risks absorbed by quasi-public associations in insuring articles not covered by private insurance firms. Total budgeted expenditures amount to approximately ¥90 million, of which about ¥34 million will be financed by borrowing (to cover the "First Reserve" in the Agriculture Sub-Account) and the remainder by premiums and transfers from other accounts. Each of the accounts appears to be nearly self-sustaining with the exception of the Agriculture Sub-Account. Under this sub-account, instituted in 1939 and consolidated with the Livestock Account in 1942, farmers are subsidized to the extent that the reinsurance premiums are paid by transfers from the General Account (1/3) and from the Foodstuff Control Account (2/3). The rates are low, however, for the account has operated continuously at a deficit, being financed in part by short-term borrowing which is never completely repaid. Although the budgets for these accounts are in general satisfactory on the basis of existing regulations, certain revisions in rates, etc. appear necessary. These changes will probably be effected during this fiscal year.
b. Fiscal Accounts.
(1) Foreign Exchange and Trade Fund. The budget for this account formerly reflected the profit and loss of the Foreign Trade Stabilization Fund, which was established to stabilize artificially the foreign exchange rates during the War. For this fiscal year, it is estimated that borrowings amounting to ¥530 million will be necessitated for the following purposes:
(a) ¥400 million, to be expended to compensate the KOEKI EIDAN, the agency which engaged in the actual, physical operations of foreign trade during the War, for losses previously sustained in foreign trade transactions.
(b) ¥30 million, to be utilized for interest payments on loans made to this account and to the new Foreign Trade Fund (set up in conjunction with the BOEKI CHO).
(c) ¥100 million, to be maintained as a reserve fund. The dissolution of the KOEKI EIDAN has been directed by GHQ, SCAP, however, and there should be ample profits from the liquidation of articles, originally purchased for export, to offset the unreimbursed foreign trade losses. Therefore, in order to limit any further "indirect" subsidization of this organization, and with the understanding of ESS/AC, the Imperial Japanese Government is instructed to delete from the budget any such expenditure to the KOEKI EIDAN and to make no payments to this organization without the authorization of GHQ, SCAP. Furthermore, inasmuch as this special account is scheduled to be abolished as soon as liquidation of the KOEKI EIDAN has been completed, the Imperial Japanese Government is further directed not to include any new items in the account, such as "interest on loans" to the new Trade Fund. Moreover, in view of the nature of this account, a "Reserve" fund is not considered necessary or desirable.
(2) Gold Fund. This is also in the nature of a fiscal account, originally designed to record the purchase and disbursement of gold. The budget for this fiscal year includes a "reserve fund" of ¥288 million, out of total expenditures estimated at ¥295 million, to be utilized for covering losses on assets held abroad. Such an item obviously should not be shown in the budget as an expenditure, but should merely be written off the books. In view of this, and to eliminate the possibility that a reserve fund of this size might be expended for undesirable purposes, it is directed that this fund be deleted from the budget.
(3) Local Allocation Tax. National Debt Consolidation. Public Loan Fund. These accounts are simple fiscal accounts set up for administrative convenience. They are essentially bookkeeping accounts, established, to facilitate the handling of certain technical phases of national fiscal administration. Rather than reflecting any additional programs or activities of government, the revenue and expenditure items contained in these accounts merely represent transactions with other governmental accounts. Therefore, the total of these accounts are duplicated in other accounts and do not need to be reviewed as budgetary programs.
c. Miscellaneous Accounts.
(1) University Account. Account for the Fund of Schools. The budget for the University Account includes a direct transfer of ¥332 million from the Ministry of Education Section of the General Budget to supplement contributions, tuition fees, etc. This item was examined by CIE in its consideration of the overall expenditures for education and was deemed reasonable. On the other hand, the budget for the School Fund, which is supposed to reflect the income to, and the disbursements from negotiable properties possessed by the various governmental schools, is completely unsatisfactory. The revenue item listed as "receipts for maintenance" is in effect an "indirect" endowment by the Government, being the estimated difference between the budgeted and actual expenditures for the Universities Account (subsequently transferred to this account as revenue). Such an item should not be permitted, for it results in the overstatement of budgeted expenditures for the Universities and is bad from the standpoint of budgetary control. Furthermore, certain of the expenditure items are not expenditures in the actual sense, but are merely investments and should be shown simply as transfers to the school fund.
6. Each of the Special Accounts Budgets includes an item of expenditure for "Reserve". It is set up as a contingent against changing conditions with no specific indication as to how it will be expended. From a budgetary point of view, the inclusion of such an item is not in itself objectionable. However, some measure of control is considered necessary over the use of such reserve funds in order to prevent their expenditure for purposes other than those examined by SCAP in the review of these budgets.
7. A summary of the total revenues and expenditures of each Special Account is given below:
Revenues (in million yen) Expenditures (in million yen)
Communications Enterprise 3,416.5 3,415.9
Imperial Railway 9,563.2 9,545.3
Monopoly Bureau 8,817.8 2,942.6
Deposit Bureau 1,812.1 1,785.0
Post Office Life Insurance & Life Annuities 2,615.1 927.1
Mint 123.1 175.9
Printing Bureau 650.7 580.7
Monopoly Bureau for Alcohol 650.0 681.9
Food Stuff Control 15,657.2 15,657.2
Charcoal & Firewood Control 3,940.8 3,940.8
Welfare Insurance 2,177.1 536.2
Liability Relief Insurance 35.4 35.4
Agriculture & Live-Stock Reinsurance 56.9 56.9
Forest Fire Reinsurance 0.9 0.9
Fishing Boat Reinsurance 31.3 31.3
Exchange and Trade Adjustment Fund 532.5 532.5
Gold Fund 19.6 295.0
Schools (University Account) 397.0 397.0
Funds for Schools 10.6 8.0
TOTAL 50,509.8 41,545.6
8. This is an administrative matter, and as such no surveillance is considered necessary. The interests of USAFIK have been considered. This action does not affect the Korean area.
9. Concurrences have been secured from:
ESS/IND - EFP, RCAP PH & W - NBN
ESS/AC - TKW CCS - JDW
ESS/PC - WSE ESS/LA - SDC
ESS/LE - CMW ESS/LE - ERM
CIE - DRR Govt Sec - CW
NRS - HGS
W. K. L.