Dr. Jun Matsunami
Professor, Graduate School of International Cooperation Studies, Kobe University

Dr. Jun Matsunami explained the financial transfers between central and local government for service provision, as a context of local government providing welfare to the aged.

The current Prefectural system was introduced in Japan in 1871. The country is divided into 47 prefectures (made up of municipalities and cities), which have their own governors, parliaments and political power. 

Aside from national defense and public pensions, 69% of public expenditure is made by local governments. As each area’s population and economy differs, this would imply differing standards of service provision from one prefecture to the next. However, an elementary school in a large city such as Kobe with 500 students would provide the same standard of education, school building and textbooks as a school in a remote village with only six students. The two areas would also have similar standards of clean water, welfare benefits and care for the elderly. 

The reason for this lies in the fact that the services delivered by central governments in many countries are delivered locally in Japan, through regionally balanced allocation of finance. Local governments are partially financed through local taxes, including Residents Tax (local income tax), Fixed Asset Tax, Enterprise Tax (local corporate tax), Local Consumption Tax, as well as other taxes. Huge financial transfers between central and local governments though, give each prefecture the same capacity to provide services, regardless of population or economic status. The transfers cover 61% of all local government expenditure. 

One such central-local transfer is Local Allocation Tax (LAT). This is calculated by deducting each prefecture’s Standard Financial Revenue (Local Tax Revenue multiplied by 0.75) from its Standard Financial Requirement (based on unit costs, population and income tax data) and adjustment coefficient. Adjustments are necessary in such cases as a school being properly funded to educate just a handful of children. The system means that all prefectures provide similar services, and a ‘welfare magnet’, population or industry attracted to a one particular area, is also avoided. The LAT transfer is financed by national income, corporation, alcohol, consumption and tobacco taxes. 

Another central-local transfer, national treasury disbursements, subsidizes public works (roads, school buildings) and legally entrusted functions by 11.4%. 

A large city such as Tokyo is not eligible for LAT due to its high local tax revenue, but receives national treasury disbursements. So, a compromise is achieved over the argument of whether central or local government should provide welfare to citizens; local governments know the needs of, and provide services for their citizens, while central government financially provides and regulates for overall balance in service quality.

In Japan, rapid population aging, with the ‘baby-boom’ generation of the 1950s and 1960s economic growth period now in their late 60s and 70s, has brought increasingly urgent welfare issues to be addressed: 

- The National Health Insurance scheme covers citizens not covered by company schemes – but with increasing costs come arguments over how those costs should be met.

- The National Pension system now covers housewives as well as retirees, and many employees are covered privately, with a mutual-aid system covering public sector workers – but many unemployed or low-wage workers are not under any system, and collecting premiums from people who do not trust the system is a challenge. The government is to increase its contribution to cover half of the pension system costs, but raising taxes to fund this is unpopular with vote-seeking politicians. The gradual integration of pension systems is also being undertaken, but even this may not create a balanced system. 

- Unemployment benefits, 25% local-government funded, are claimed by around 40,000 people in Kobe and 1.5 million people nationwide, but numbers are increasing rapidly. 

Housing for the aged is not such an issue, as home ownership has been encouraged by the government since the Second World War. As much as 97.3% of those living with descendents, and 74.7% without, are homeowners. But home ownership itself is not sufficient, and care services have to be provided by local governments.