Local governments scramble under impact of budget-allocation reform

KAWAGUCHI, Saitama Pref. (Kyodo) Prime Minister Junichiro Koizumi's decision to reduce subsidies and budget allocations to local governments has local officials frantically crunching the numbers to balance their budgets.

The city of Kawaguchi, Saitama Prefecture, with a population of about 500,000, was denied money from the national budget for the first time in 10 years in fiscal 2006 because its tax revenue rose. But city officials says they still needed the money.

"Tax revenue may slightly increase also in the future, but our financial condition is never satisfactory," said Junichi Hashiguchi, head of the city's finance section.

"There are many schools requiring quake-resistance work, but how should we secure the financial resources? As the man in charge of the finances, it's a headache."

The Kawaguchi Municipal Government has worked out what it calls "a concentrated reform plan." One problem it expects is an increase in social security expenses as the birthrate declines and life spans increase.

Estimating a revenue shortfall of more than 15 billion yen by fiscal 2009, the plan, which started this fiscal year, cuts civil servants' salaries and expenses in all projects, including road and school construction. The government also has decided to sell some of its land.

From fiscal 2004 to 2006, the central government has funneled a total of 3 trillion yen in tax revenue to prefectural and municipal governments, but reduced subsidies by 4.7 trillion yen and budget allocations by more than 5 trillion yen.

"If the budget-allocation reform continues at this rate, local government finances will be battered," one budget expert said.

The Fiscal System Council, which advises the finance minister, said in a June report local fiscal reform, including the reduction of the distribution rate, was necessary. It said the central government would likely pass on the pressure to cut the national deficit to the local governments.

Koizumi implemented fiscal reform under the premise of locals taking action at the local level, saying change would give local governments more control over their budgets.

"But what has actually happened is far from the original purpose of decentralizing," said Kochi Gov. Daijiro Hashimoto at a meeting of prefectural leaders in Tokyo in early August.

The main topic at the meeting was future budget-allocation reform. The leaders discussed the problems of Tokyo securing a sufficient tax-revenue supply for the transfers to local governments and the way in which the transfer amounts are calculated.

"It is unclear what the state and local governments should each do. It is not appropriate to discuss the distribution rate without considering the division of roles," Iwate Gov. Hiroya Masuda said.

Fiscal analysts say that the next administration will have to make drastic changes in how the state and local governments will share the limited financial resources.