## Three-Pronged Reform

In order to promote structural reform toward local independence, it is necessary to mutually connect financial resources, including national treasury subsidies, the local allocation tax, and the transfer of financial resources, and to study them in a uniform manner.

Reference

(Decided by the cabinet on June 25, 2002.)

## Basic Policy on Economic and Fiscal Management and Structural Reform, 2002 (Excerpt)

## Part 4 Structural Reform in the Main Areas of Expenditure

### 3. National and local governments

(1) Regarding local administrative and fiscal reform, it is necessary to promote such reform in a forceful and uniform manner. First of all, state involvement should be reduced, and the powers and responsibilities of local governments should be greatly expanded. Taking account also of studies and discussions in the Committee for the Promotion of Decentralization, each minister, under the guidance of the prime minister, with responsibility should study the abolition or reduction of national treasury subsidy projects, including those in the fields of welfare, education, and social capital, with the aim of reaching a conclusion by the end of the year.

(2) In light of these considerations, a three-pronged study should be carried out on the form of national treasury subsidies, the local allocation tax, and the distribution of financial resources from taxes, including the transfer of financial resources from taxes from the state to the regions, and a reform draft including the desirable form of these elements and the specific reform process to achieve this result should be compiled within the next year from now.

This reform draft should aim for a reduction in the scale of national treasury subsidies of several trillion yen during the period of “reform and outlook.” At the same time, there should be a reform of the local allocation tax. It is necessary to drastically rectify the current situation in which more than 90% of local governments receive the local allocation tax. For this purpose, the reform should entail a revision of the local allocation tax’s financial resource guarantee functions as a whole and a reduction during the period of “reform and outlook.”

On the other hand, it still remains necessary to rectify the differences in financial strength among local governments. It should be discussed to what extent and how they should be corrected and included in the above-mentioned reform draft. Together with these reforms, with regard to those subsidies among the national treasury subsidies to be abolished that are deemed necessary to be continued independently by local governments, they should be transferred to independent financial revenue sources of the local governments after careful investigation of the necessary transfer amounts.

At present the shortage of financial resources in local governments amounts to approximately ¥14 trillion. This situation should be remedied as soon as possible through such efforts as the reduction of expenditures and the expansion of local taxes. After that, it should be aimed to break away from the dependence on financial resource guarantees through the local allocation tax and to realize the true financial independence of local governments.