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Monday, Aug. 20, 2001

BASICS OF LOCAL AUTONOMY

Obstacles to decentralization must embrace independence


Prime Minister Junichiro Koizumi won big gains for his Liberal Democratic Party in the Upper House election and has been re-elected uncontested to a new two-year term as LDP chief. But the tasks ahead of him are mounting, and one of the biggest is the decentralization of administrative power.

When Japan was trying to rebuild itself from the devastation of World War II, the central government pursued a policy of uniform development in all regions so it could guarantee the people a "civil minimum" quality of life.

Today, however, it seems necessary to give greater autonomy to local governments so that each can become more responsible for its own unique regional development and less dependent on the financial largess of the debt-laden central government.

The Diet has already revised a total of 450 relevant laws to promote decentralization, handing local governments greater power and substantially scaling down the involvement of state authorities. Still, decentralization has only just begun, and there is much that needs to be done.

The first of the pending issues concerns the distribution of local taxation powers as an alternative to tax transfers to local governments.

Under the current funding system, which is intended to ensure the civil minimum can be guaranteed in each region, 32 percent of the central government's revenue from income and liquor taxes, 35 percent of that from corporate taxes, 25 percent of tobacco tax and 29.5 percent of the consumption tax are automatically transferred to local governments.

The system has been criticized for encouraging lax fiscal discipline because they enable local governments to make ends meet, even if they have been running up deficits.

Many a prefecture or municipality has been tempted to pursue the construction of expensive facilities without a clear vision of how such projects will affect their finances. Good examples are the art museums being built by municipalities everywhere, even by those without art collections to exhibit.

Local governments are also under fire for making insufficient efforts to collect tax revenues. They tend to undervalue local land prices when calculating taxes on fixed assets -- the main source of local tax revenue -- to minimize the burden on local taxpayers. People believe a Diet member's job is to secure Finance Ministry allocations for public works projects in his or her constituency.

This system worked for awhile as Japan enjoyed the rapid period of economic growth that followed the war, but that kind of activity has become unsustainable, and the collapse of the asset-inflated bubble economy has sharply cut into the state's tax revenues. The combined total of the national and local government debts is expected to reach 666 trillion yen at the end of March 2002. The amount of outstanding local government bonds, which came to roughly 100 percent of local government expenditures at the end of the 1980s, has doubled to 200 percent.

People who have grown accustomed to using the locally allocated taxes as a budget deficit stopgap, even though they may realize the system will no longer be as sustainable as it used to be, are wondering why the system needs to be changed during a time of economic hardship. Policymakers need to clarify which national taxes should be converted into local taxes and strictly adhere to the principle of taxing those who receive the benefits.

The second issue is whether the government can follow through on its plans to reduce the number of municipalities to 1,000 from the current 3,224 by March 2005, when the special legislation drafted to promote mergers of cities, towns and villages expires. The target is based on the estimate that at least 800 to 1,000 public workers are needed to maintain an independent administrative body, and that each municipality should have a population of at least 100,000. Each municipality must also broaden its scope as it tries to secure medical and nursing care systems for its aging population.

Before mergers of cities and towns are carried out, the fiscal balance sheet of each must clearly disclosed. Merging with a debt-laden town will not be endorsed by local residents, and the experience of the European Union's integration shows that merger partners first need to reduce their debts to a certain standard. In addition to the official disclosure of debt, hidden fiscal problems, such as losses incurred by third-sector firms or the costs of maintaining nursing care, also must be scrutinized.

In addition, we must realize that some local communities maintain a closed nature that originates from their historical background, and that they may harbor an emotional antipathy toward neighboring municipalities which cannot be reasonably explained. Such factors could pose obstacles when merging municipalities select new names and attempt to establish an integrated municipal office.

Under the structural reforms pursued by the Koizumi Cabinet, all the past systems -- including the tax systems -- will be reviewed without exception. Koizumi has already put public works projects under scrutiny. As the government promotes decentralization, the general public needs to fully understand the national and local fiscal conditions and change its mind-set about relying on central government help.

Now that the civil minimum has reached a fairly sufficient level in most parts of the country, we must look back on the basics of local autonomy and realize that we have to deal with local problems with our own tax money.

Teruhiko Mano is an adviser to Tokyo Research International Ltd.


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