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The government’s Council on Economic and Fiscal Policy on Friday finalized a basic economic reform policy that features such revitalization and tax reform measures as corporate tax cuts and consolidation of government expenditures in the fiscal 2003 budget.

The reform blueprint, which is expected to be approved by the Cabinet on Tuesday, constitutes the second phase of Prime Minister Junichiro Koizumi’s “big-boned” structural reform agenda. The first outline last year did not specify what steps should be taken in these areas.

The reform agenda proposed Friday by the policy-setting panel combines two separate packages — for economic revitalization and tax reform — that the panel adopted earlier.

The measures will be explained by Koizumi to other leaders attending next week’s summit of the Group of Eight nations in Kananaskis, Alberta, in an effort to prove that he is still determined to carry out reforms.

Regarding the government’s policy for the next fiscal year, however, the blueprint was watered down from its original, an apparent setback for Economy and Fiscal Policy Minister Heizo Takenaka, a reform proponent who played a central role in drafting the document.

On Thursday, Takenaka’s draft met opposition from Liberal Democratic Party lawmakers. Phrases in the original were toned down, such as changing “scaling down the public works budget” to “promoting more efficient use” of public works outlays. Similar changes were also made regarding official development assistance allocations.

The original draft of the policy blueprint was hammered out by the economic panel on June 13. The government had since held consultations with the three ruling parties over its contents.

The LDP did not approve the reform agenda during its Executive Council meeting Friday, although it gave the green light for it to be endorsed by the Cabinet, saying the party will continue to hold a “free hand” in discussing specific budgetary items.

Executive Council head Mitsuo Horiuchi told a news conference after the gathering that the LDP reserves the right to freely discuss the policy outline’s contents.

In addition to fears over possible spending cuts, the LDP was also concerned the package did not include sufficient measures to support fundraising by small and medium-size companies.

The package now includes such phrases as “efforts will be promoted to smoothly implement fiscal loans and investments” for smaller firms.

Meanwhile, after submitting the reform blueprint to Koizumi at the Prime Minister’s Official Residence, Takenaka told a news conference “I believe we said what we wanted to in the reform agenda. Despite some changes in its wording, our policy direction remains the same.”

Economic revitalization steps featured in the blueprint are based on six strategies: promoting science and technology; developing human resources; nurturing entrepreneurship; stimulating potential private-sector demand; revitalizing local communities; and further opening the domestic market to foreign businesses.

The six strategies entail 30 action plans, including the creation of special zones in which regulations would be drastically eased to promote private-sector activity.

On tax reform, which covers the four-year period between fiscal 2003 and fiscal 2006, the panel calls for reducing the overall tax burden on corporations to help bolster Japanese firms’ international competitiveness.

Ways to reduce corporate taxes center on a combination of rate cuts and tax-base expansion by introducing the pro forma standard for companies.

The pro forma standard is based on the size of companies rather than their earnings, making it possible for firms in the red to be subject to taxation while those in the black might benefit from lower rates.

Other corporate tax reforms proposed by the panel include the introduction of incentives to facilitate corporate spending on research and development and information technology.

Regarding individual income tax, the reform agenda calls for a policy shift to a system that levies taxes on a broader base, but at lower rates. It recommends that various tax deductions — such as those for spouses — be scaled down.

In principle, the proposed tax cuts are not supposed to depend on government bond issues to cover revenue shortfalls, according to the agenda. This is line with Koizumi’s desire to reduce the nation’s fiscal debt.

Regarding the budget-making policy for fiscal 2003, the blueprint calls for capping the fiscal 2003 general account budget at the fiscal 2002 level.

The council calls for allocating more funds to key priority areas — including life sciences, information technology and nanotechnology — following the example of last year’s budget.

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