Local Public Financial Bureau(LPFB)

Roles of regional finance

The administration linked closely to citizens' lives, such as welfare, school education, fire defense, roads, rivers, and other social infrastructures, is conducted in most cases by local government. Regional finance therefore plays an extremely important position, so to speak, as one of the two wheels of a vehicle together with national finance. Consequently, the regional finance for fiscal 2011 totaled 82.5 trillion yen.
Increasingly important will be the roles of local governments and accompanying financial measures, such as promoting regional sovereignty reforms, supporting nursing, medical parental cares designed for the society with a declining birthrate and ageing population.

Regional finance today (Fig. A)

Fig. A: Changes in the balance of loans in regional finance

Regional finance is the totality of the finance of about 1,700 local governments, most of which are financially weak municipalities. The shortage of funds for regional finance increased swiftly in and after fiscal 1994 due to the decline in local tax revenues, tax cuts, and for other reasons. After that, fund shortages were on a downward trend, but the decline in local taxes and five national taxes - the source of local allocation taxes - underwent a great increase in fund shortages in fiscal 2010, reaching a record of 18.2 trillion yen. Fiscal 2011 saw a recovery in corporate income and other developments, resulting in a rise in local taxes and national tax income - the source of local allocation taxes. The financial deficit consequently amounted to 14.2 trillion yen, still a huge figure.
Moreover, the balance of loans in regional finance grew rapidly in recent years due to the decline in local tax revenues, compensations for tax cuts, and the increased issuance of local bonds for stimulating the economy. The end of fiscal 2011 saw the loans growing to 200 trillion yen, accounting for 41.4% of GDP. This marked a 2.9-fold increase since fiscal 1991, showing an increase of 130 trillion yen.

Distribution of tax sources between the central and local governments (Fig. B)

Fig. B: Fund distribution between the national and regional treasury (fiscal 2009)

To ensure financial balance among regions, a certain percentage of national taxes (called a local allocation tax) was also appropriated to the regions as a fund with unspecified uses. Treasury disbursements such as subsidies with uses designated in general are paid out to the regions. The final spending base is therefore based on about a 2 to 3 ratio of the state to regions.
The ratio of the state to regions on a final spending basis is opposite the ratio of the state to regions in terms of distributing tax revenues. Thus, the funding for local public entities to run their projects has been shifted from the state to the regions.

Securing Fund through regional financial planning

The LPFB ensures funds for local governments through the regional financial planning (a set of plans that grasp in general the scale of regional finance, which is the financial complex of various local governments, and balance prospects) to allow local governments to carry their important responsibilities regardless of the regional gaps depending on the degree of population and industrial density and regardless of the gaps in tax revenues between fiscal years due to business trends. Through local allocation taxes and local bonds, along with other means, the LPFB ensures funds for the local public governments.

Securing a fund for local bonds

The annual expenditures of local governments are, as a rule, covered by annual revenues other than local bonds (loans obtained by local governments). However, for expenses for construction projects and other expenses, which should desirably be borne by future inhabitants, or for disasters and other situations temporarily requiring significant expenses, local bonds can be used as a fund source. The LPFB drafts a local bond plan for each fiscal year, thereby determining projections for local bonds to be issued.
In fiscal 2009, the Financial Organization for Local Public Enterprises was reorganized to establish the Japan Finance Organization for Municipalities as "a financial organization for joint use by regions" designed to grant loans for general accounting, in order to respond to the financial needs of local public entities in a timely and appropriate manner.

Planning and drafting programs for local public enterprises

The LPFB plans and drafts programs, takes financial measures, gives advice, and renders related services regarding local public enterprises.
[Roles of local public enterprises]
Local public enterprises provide projects for waterworks, traffic, hospitals, and sewage, and other services indispensable to the lives of regional inhabitants and to the development of the regions (8,903 projects at the end of fiscal 2009).
[Size of settled accounts of local public enterprises (fiscal 2009)]
The settled accounts of all the local public enterprises total 18 trillion 459.4 billion yen, accounting for about 20% of the settled accounts of the expenditure of the ordinary account of all the local public associations.

Adjusting funding through local allocation taxes

Local governments should ideally be financed by their own funds, such as local taxes collected by themselves. However, in reality, fund sources are regionally unevenly distributed. A mechanism is therefore needed for adjusting this uneven distribution and for ensuring general fund sources (fund sources with their uses unidentified and which can be used for any kind of expenses) to organizations with low local tax revenues. Established for that purpose is the local allocation tax.
The local allocation taxes in fiscal 2011 totaled 17 trillion, 373.4 billion yen, showing an increase in 0.5 trillion yen from the preceding fiscal year.

Making regional finance soundness

The budget of regional finance became increasingly rigid due to the reimbursement of local bonds issued in the past, a rise in social security expenses due to the falling birthrate and the ageing population. It is, therefore, much important to make regional finance sound. The LPFB ensures enough financial resources for the stable financial management through the regional financial planning etc. The LPFB helps the local governments make their finance sound under "the Law relating to the financial soundness of local governments, etc", which stipulates the disclosure of financial barometers and the mechanism for reconstruction.


Concerning "Fiscal Management Strategy"(Cabinet Decision 2010.6.22)

In fiscal 2010, the revenues from national taxes accounted for 40% of total annual expenditures in the national budget, with government loans exceeding said revenues and thus marking an abnormal situation. A similar situation was seen in local finance in that its financial shortage reached a record high of 18.2 trillion yen, with the five national taxes amounting to 8.2 trillion yen, as opposed to 16.9 trillion yen in total local allocation taxes. Consequently, how to make their finances sound became an urgent challenge for both the state and regions, entailing proactive work on administrative reforms and other measures to make their administration sound. In response to the problem in Greece, greater attention was being paid on the efforts made by each country in rebuilding its finances.
Under these circumstances, the "Fiscal Management Strategy" was decided at the Cabinet meeting on June 22, 2010, stipulating that for the national and local governments primary balance the deficit ratio to GDP shall be halved from the ratio in FY 2010 by FY2015 at the latest, and the surplus shall be achieved by FY 2020 at the latest.
The "Fiscal Management Strategy" was designed so that, given the fact that regions are already working on administrative reforms and other measures, and since their primary balances are in the black and in terms of regional sovereignty reforms, the central government should consider the question of maintaining independent and stable fiscal management by local governments, and should not take any measures that would undermine their autonomy or shift burdens onto them, and shall keep the total amount of general resources available to local governments, which are required for stable fiscal management of local governments including those receiving grants, in substance, at least at the FY2010 level. In response, the total general resources of local taxes, local allocation taxes, and similar charges in fiscal 2011 exceeded the fiscal 2010 level.
To promote regional sovereignty reforms, the LPFB will work to secure an appropriate level of total general sources for the local governments.