Local finance is in severe condition. It will continue to have a great deficit and its balance is estimated to be negative 195 trillion at the end of March 2003.

There are two main reasons for the deficit of local finance. First is the decrease of revenue from local tax and local allocation tax because of recession. Second is annual the increase of annual expenditure from constructing infrastructures and promoting local welfare. The increase of public investment to deal with the recession, and the increase of redemption of local bonds issued to cover a deficit from reduction of taxes are also reasons for the deficit of local finance.

It is necessary to stimulate economics through reforming economic and social structure and increase the local revenues such as local taxes. It is also necessary to simplify administration of central and local governments and balance the local budget.

Moreover, it is also important to prudently investigate problems on local finances such as reallocation of tax sources between central and local governments.

　

There are gaps on financial scale among local governments and we must reallocate tax sources. Moreover, central government demands local governments to appropriately administrate education, police, firefight, social welfare, and public investment by laws and regulations.

It is important to decentralize central government by changing laws and regulations and cutting subsidy and enhance local autonomy. It is also important to expand local taxes and to transfer taxes from central government to local governments.

　

Mr. Katayama, Minister for Public Management, Home Affairs, Posts and Telecommunications Minister of General Affairs, announced 'Policies towards 2002 fiscal year' in August 2001.

First, he proposed to raise total amount of taxes in local government. His view is to make the total amount of national taxes and that of local taxes to be equal by transferring central taxes to local governments. He thinks that it is necessary to make it clear that those who gain benefit should pay taxes according to the amount of their benefit.

Second, he proposed the reform of the local allocation tax. He suggested; to reduce the amount of local allocation tax calculated by the amount of the public investment; to reduce the amount of local allocation tax calculated according to the size of the local government (smaller the local government, the more they get local allocation tax); to reduce the rate of reservation in order to induce more local taxes. He believes this reform would make local governments to administrate autonomously. He also proposed; to increase expenditures to make each local government develop uniquely; to reduce fixed expenditure; to reduce local officers; to reduce public investments and increase information oriented expenditures. He plans to reduce local public investments without subsidy from the central government by 10 % in the 2002 fiscal year. This would reduce total amount of debt of each local government.

　

Mr. Katayama announced 'Tentative plan for total reform of local finance and reallocation of tax sources' at Council on Economic and Fiscal Policy in May 2002 to make his proposals concrete.

He planned to reduce state subsidy to local governments by 5.5 trillion and make it up by transferring national taxes to local taxes so that the ratio of total amount of national taxes to that of local governments would be .52 to .48.

Along with reallocation from local allocation tax to local taxes, he plans to make total amount of local taxes would be equal to that of central government. This reallocation would be possible by reducing local expenditures, improving local finances and eliminating special local debts.

　

In response to Mr. Katayama's proposal, Cabinet Meeting decided to adopt 'Basic policy on economics, finance, and structural reform in 2002' in June 2002. In this policy, Cabinet Meeting decided to make reform plan to investigate state subsidy, local allocation tax, and reallocation of tax sources from central to local governments at the same time. CM will make this plan until June 2003.

Cabinet Meeting plans to reduce state subsidy by amount of several trillion yen. It also proposes to reduce local allocation tax because more than 90% of local governments receive local allocation tax. Cabinet Meeting emphasizes to continue to have a system to correct the difference of financial power among local governments and decided to include in the plan. Cabinet Meeting decided to calculate total amount of state subsidy that will be eliminated and to transfer national tax to local tax by that amount. There is total negative balance of 14 trillion in local governments. Cabinet Meeting proposes to cancel this out as soon as possible by cutting expenditure and by transferring national tax to local level. Cabinet Meeting tries to realize financial autonomy of local governments.

It is necessary to reform administration and finance of local governments and decentralize central government and expand power and responsibility of local governments. Cabinet Meeting decided to conclude a plan for state subsidy until the end of 2002. It will refer to discussions of The Council for Decentralization Reform and will be led by Prime Minister and related Ministers.

Commission on government decentralization pointed out that it is necessary to examine new local administration system including central government decentralization and mergers of municipalities in the final report in June 2001.

The report concludes that we need to investigate many proposals to reform present local administration system in accordance with the result of mergers of municipalities being processed based on the Special Act of Mergers of Local Municipalities. These proposals include state system, federal system, and feudal system.

We tend to emphasize on the transfer of powers from central government to local governments. However, decentralization of government means to allocate powers appropriately to central and local governments. The report points out that there are some powers that should be transformed from cities to prefectures, or from prefectures to central government.

　

Council on Economic and Fiscal Policy decided to investigate local administrative system to change powers and responsibilities of local governments according to their size in the Cabinet Decision of 'Basic Principles for Economic and Fiscal Administration and Structural Reform on Economics' in June 2001. It sets its goal to enhance their attractiveness and international competitiveness, and to establish local autonomy. It promotes mergers of municipalities and re-organize local administrative system according to the size of municipalities. For example, it suggests to give more powers and responsibilities to municipalities with or more than 300,000 population and to diminish powers and responsibilities from smaller municipalities.

'Basic policy on economics, finance, and structural reform in 2002' was decided by Cabinet in June 2002. It suggested to investigate prefectures and municipalities with regard to the mergers of municipalities in accordance with the discussion of the Local System Investigation Committee.