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The government has come up with a new budget reform proposal aimed at achieving a primary budget surplus by fiscal 2011 by cutting spending and raising taxes, government sources said Thursday.

The plan slashes the government’s projected revenue needs for all policy-related spending in fiscal 2011 (without issuing government bonds) to about 16 trillion yen from the initially projected 20 trillion yen.

This reflects expectations for higher tax revenues from the economic recovery and additional efforts to cut government spending.

The proposal also emphasizes an overhaul of local public finances. This includes reducing the statutory percentage of national tax revenues used for grants to local governments, and cutting wages for local public servants, the sources told Kyodo News.

It also calls for securing stable financial resources to cover rapidly increasing social security costs, they said. This is being interpreted as a request for a consumption tax hike linked to social security spending.

The Fiscal System Council will submit the proposal to Finance Minister Sadakazu Tanigaki next Wednesday. The government will have its contents reflected in its annual economic and fiscal policy guideline to be adopted by the Cabinet in early July, the sources said.

At the same time, the government and ruling parties will work out the specific spending reductions and tax increases required to produce the primary budget surplus by fiscal 2011, they said.

A primary budget surplus means revenues (other than government debt issues) will exceed expenditures (excluding debt servicing), giving the government a chance to prevent its debt from snowballing further.

The proposal emphasizes that if a primary budget surplus materializes, it should be expanded to 1.5 percent of gross domestic product in order to significantly reduce the government’s outstanding debt, the sources said.

In addition to the local public finance overhaul, the proposal calls for reforming the public assistance program, ending government contributions to unemployment benefits, continuing an annual 3 percent cut in public investment and streamlining the medium-term defense buildup program.

Separately, government sources said the annual policy guideline will be presented to the Cabinet on July 7. The date was set in line with the urging of several key figures, including trade and industry minister Kaoru Yosano, who wanted it to clear the Cabinet before the Group of Eight summit in St. Petersburg, Russia, they said.

The guideline, which forms the backbone of the state budget for the following fiscal year, is usually drawn up and endorsed by the Cabinet in June. However, the process has been delayed this year due to protracted discussions on fiscal reconsolidation within the ruling parties.

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