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Increasing the Driving Force of the Sanmi‐Ittai Reforms

June 14, 2005

Overview

The debate on the sanmi‐ittai [ʺthree‐in‐one ʺ] reforms is intensifying once again. As fiscal 2006, the final year, approaches, the discussion is entering its final stages. However, there is still no predicting whether the sanmi‐ittai reforms will achieve their principal objectives, especially those relating to local autonomy and efficient government. The main reasons are the three problems inherent in the sanmi‐ittai reforms.

The first is the imbalanced distribution of sources of tax revenue. In the provinces, especially where sources of tax revenue are by no means adequate, it will be difficult to secure sufficient tax revenue to offset the discontinuation of state contributions. Moreover, if the government sticks rigorously to its policy of restricting local allocation tax transfers, it is highly likely that some areas will face a severe revenue shortage. If one takes the view that the police, the fire service and compulsory education are basic public services, it is unacceptable that the economic gaps between regions should make it impossible to achieve a national minimum.

The second is the question of what scope there may be to cut expenditure and rationalize local government. A comparison of the scale of local government with that in other major developed nations suggests that, in Japan, there is scope for further restriction and reduction of capital formation. By contrast, the level of government consumption in Japan is among the lowest, on a par with that of France and the United Kingdom, and without the abolition or a fundamental review of business and operations it is highly likely that the scope for reducing expenditure will remain limited.

The third relates to schemes for fund distribution, in other words, the routes by which local governments procure funding. Arrangements in the other five major developed nations (France, Germany, Italy, United Kingdom, United States) can be characterized as follows:
(1) All five countries transfer funds from central to local government. However, the means by which they do so differ.
(2) In France, Italy and the United Kingdom, where central government tax revenue accounts for the greater part of total tax revenue, central government grants are the principal source of local government funding.
(3) In Germany, where central and local government tax revenues are equal, the fiscal adjustments between state governments are the principal means of transfer, but fiscal adjustments between federal and state governments and earmarked subsidies are also used.
The United States, where regional autonomy has been emphasized since the nation was founded, is an exception in worldwide terms as its only system for the transfer of funds is earmarked subsidies.

In Japan, central government tax revenues accounted for some 57.9% of all tax revenues in 2002, and local government tax revenues for 42.1%。 If the ¥3 trillion in tax revenue sources to be transferred under the sanmi‐ittai reforms is taken into account, the relative shares are similar to those seen in Germany or the United Sates, that of central government standing at 54.1% and that of local government at 45.9%. In this light, rather than arrangements for the transfer of funds from central to local government, it is, if anything, the lack of a system for fiscal adjustment between regions in Japan at present that is the core problem facing the sanmi‐ittai reforms.

Moreover, if the sanmi‐ittai reforms are to achieve their main objectives, especially local autonomy and the realization of efficient government, it is urgent that the following measures be implemented. (1) Achieving local autonomy requires that sources of revenue be secured and that power be devolved from central to local government. In terms of sources of revenue, the problems are in what areas there should be a national minimum and what the level of services should be. As regards the transfer of power, regulations should be treated as guidelines and local initiatives that exceed standards should be encouraged. (2)Achieving efficient government depends on success in expanding the range of entities providing public services (NPO, companies, agencies, etc.) and encouraging competition between entities with a view to improving services.

For more information on the content of this report, please contact: Hidehiko Fujii Business Strategy Research Center Economics Department the Japan Research Institute, Limited.

Tel: 03-3288-4615
E-mail:fujii.hidehiko@jri.co.jp

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