The Law for the Restoration of Soundness to Local Government Finance and its Impact on Local Government Finance
July 27, 2007
The Law for the Restoration of Soundness to Local Government Finance was enacted on June 15 this year. The regulations governing the publication of indicators come into force within a year of the promulgation of the Law; those governing the obligation to draw up plans come into force in fiscal 2009. The Law (i) expands the scope of supervision beyond ordinary accounts to include public and third-sector corporations, (ii) introduces indicators for the assessment of fiscal conditions that take account not only of single fiscal year flows but also of stock factors, and (iii) sets out to improve fiscal conditions by identifying deterioration at as early a stage as possible.
Of the indicators of fiscal soundness to be published, four relate to the local government body as a whole and one relates to public corporations. The former are real deficit ratio, consolidated real deficit ratio, real local government bond cost ratio, and future burden ratio; the latter is funding shortfall ratio.
With regard to real deficit ratio, five municipal government bodies in the Kansai Region are thought likely to be subject to early corrective measures using the standard values for the control of municipal bond issuance. With the exception of the city of Yubari, the municipal governments subject to such early corrective measures are concentrated within the Kansai Region, only 3 lying outside the Region.
With regard to consolidated real deficit ratio, figures are expected to vary according to the method of calculation, which the government is currently considering, but if the same standard values are used as for (iii) are applied to local government bodies in the Kansai region whose public enterprise accounts are in deficit, the likely figure is 17. Some of these local government bodies have large deficit ratios.
The impact of the transition from the old standard for municipal bond issuance (debt issuance limit ratio) to the new standard (ratio of real public bond costs) is that 382 (20.7%) out of 1,844 local government bodies nationwide will be permitted to issue municipal bonds under the new standard, as against 260 (14.1%) under the old standard, which represents a substantial increase. In the Kansai Region alone, 26.6% of local government bodies (55 out of 207) will qualify for bond issuance under the new standard of the ratio of real public bond costs, somewhat more than the nationwide ratio of 22.3%.
The introduction of the new assessment indicators will allow monitoring of (i) failure to carry out the necessary transfers to other accounts for the public enterprises and manipulation of ordinary accounts to show a surplus (ii) the impact of the balance of municipal bonds outstanding generated by public corporations, regional affairs associations, etc. on the ordinary account burden and (iii) the debt burden on local government finance in subsequent fiscal years, including local public corporations and third-sector corporations.
Issues raised by the enactment of the new Law include (i) greater monitoring of the interest taken by local residents in the finances of local government bodies and of the proceedings of local government assemblies, using the mechanism for the publication of indicators, (ii) greater disclosure by local government bodies, (iii) the introduction of complementary indicators and a clarification of the rules where there is scope for discretion in the method of computation of indicators and (iv) an examination of the treatment of debt and the responsibilities of local government bodies with regard to local public enterprises, local public corporations and third-sector corporations, which are facing real difficulties.
For more information on the content of this report, please contact Tomoyuki Yokota, the Japan Research Institute, Limited.