Impact of COVID-19 on Local Public Finance―Did every individual local government’s balance of general account worsen in the COVID-19 pandemic?

While COVID-19 measures had not been incorporated at all into the Local Finance Plan decided by the central government nor the local allocation tax(general non-matching grants) for individual local governments for FY2020, intergovernmental transfers were allocated to local governments through three supplementary budgets drawn up by the central government, and a sum amounting to 20 trillion yen in additional national treasury disbursements was granted toward local policy measures for the response to COVID-19 measures. The majority of that was used to cope with an increase in expenditures, including special lump-sum benefits of 100,000 yen per citizen paid by municipalities and fully-subsidized by the central government. The expansion of “financing system loans”(loans coordinated by banking facilities, credit guarantee association and local governments) for individuals and small- and medium-sized enterprises (SMEs) also increased revenues and expenditures of the general accounts; the total revenue for all local governments increased by more than 26 trillion yen year-on-year and total expenditure increased by more than 25 trillion yen year-on-year, resulting in a slight improvement in the general account balance.

Much of the additional national treasury disbursements could be described as being neutral against the revenue and expenditure, but it is possible for the aggregated balance to either improve or worsen depending on how the “COVID-19 Temporary Grant for Regional Revitalization” was used and the operations was implemented toward local fiscal policy, which was functioned as both categorical matching and non-matching grants. Accordingly, by grouping prefectures, municipalities that received the local allocation tax and those that did not, based on their population size, then analyzing the FY2020 settlement accounts of individual local governments, we found that the “modified real single fiscal year balance” (an indicator modified from the published “real single fiscal year balance”, measuring substantial changes both in a cash balance of general account and the Fiscal Stability Funds) had improved for more than 80% of the prefectures and about two-thirds of the municipalities. However, when this indicator is broken down into a “single fiscal year balance”(as an indicator of substantial changes in cash balance) and changes in the Fiscal Stability Funds, we found that the breakdown of the indicator was not uniform—40% of the local governments saw improvements in both aspects, 20% saw only in the “single fiscal year balance” surplus, 30% saw only in the increase in the Fiscal Stability Funds, and 10% saw both worsen. The impact of the COVID-19 pandemic has lingered on in both FY2021 and FY2022, and there is a need to continue conducting such analyses.

Keywords: single fiscal year balance, Fiscal Stability Funds, COVID-19 Temporary Grant for Regional Revitalization

JEL Classification: H70

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Natural Disasters and Local Government Finance

This paper uses the data on municipalities in the administrative cash flow statements prepared by the Ministry of Finance to clarify the debt repayment capacity and cash flow situation of local governments, to demonstrate quantitatively the impact that earthquakes and other natural disasters have on the finances of local governments, including their cash flow and debts.
　According to the results of the analysis, specific local governments that have been affected by natural disasters, excluding the Great East Japan Earthquake, record a temporary downturn in the total balance per capita, administrative balance, and primary balance immediately after a disaster. This downturn in total balance is brought about by the failure to compensate for the drop in special administrative balance, caused by expenditures on the implementation of disaster recovery projects, with the administrative current balance and the fiscal balance. This strain is manifested in the stocks, as represented by increases in outstanding local government bonds and decline in fiscal adjustment funds, and the balance of fiscal adjustment funds shifts toward a decline from the first fiscal year of the disaster. While the national government has in place fiscal support measures for local governments affected by disaster, in light of the reality of local governments withdrawing from their fiscal adjustment funds and allocating them to emergency response and disaster recovery, it is important to build up fiscal adjustment funds to a certain degree to ensure that there are no financial obstacles to emergency response and recovery activities. Administrative balances begin to show signs of improvement six years on from the disaster. However, rather than an increase in tax revenue from post-disaster reconstruction, this is attributed more to an increase in local allocation tax, brought about by allocation tax measures for the cost of principal and interest redemption on local government bonds issued immediately after the disaster.

Specific local governments affected by the Great East Japan Earthquake have considerable leeway in their cash flow situation when compared with specific local governments, due to the largely consistent and continued trend of increases in total balance per capita and in administrative balance after the disaster. The large surplus generated from the administrative balance is accumulated in other specific purpose funds and becomes the funding source for reconstruction projects implemented in later years. Although the presence of this abundant balance of reserves, etc. significantly reduces real debt, progress in reconstruction projects gradually reduces the balance of reserves, etc. At the current pace, the balance of reserves, etc. is expected to fall to the same level as organizations other than specific local governments affected by disaster in the near future.

Keywords: natural disasters, serious disasters, local governments, fiscal situation, cash flow, administrative cash flow statements, understanding the financial situation

JEL Classification：H71, H72, H74, H77

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Fiscal Rules and Fiscal Deficits―The Impact that the Act on Assurance of Sound Financial Status of Local Governments has on the Fiscal Indicators of the Assessment of Fiscal Conditions

The analysis in this paper, carried out using data on municipalities, focuses on the Act on Assurance of Sound Financial Status of Local Governments and the financial indicators used to understand the financial situation, with the aim of capturing the impact that the introduction of new financial rules has on indicators that are not subject to monitoring. Firstly, an analysis was conducted on financial indicators as outcomes for understanding the financial situation. Secondly, an analysis was conducted on indicators for soundness as outcomes, based on the Act on Assurance of Sound Financial Status of Local Governments. Thirdly, an analysis focusing on revenues and expenditures was conducted to investigate the factors contributing to the improvement or deterioration of financial indicators and indicators for soundness. Although all indicators for fiscal soundness, which are subject to monitoring, are improved from the perspective of fiscal soundness of municipalities, the administrative current balance ratio and the primary balance, which are not subject to monitoring, are worsened from the perspectives of cash flow and debt repayment capacity. This result is brought about by an increase in revenues over the increase in expenditures, along with the significant impact of increases in local allocation tax and extraordinary financial measure loans. Municipalities are likely to be prioritizing actions to build up reserves for addressing various crises in the future, while at the same time making efforts to repay current debts.

Keywords: fiscal rules, fiscal deficits, Act on Assurance of Sound Financial Status of Local Governments, Fiscal Indicators of the Assessment of Fiscal Conditions

JEL Classification：H72，H73，H74，H77

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Use of Financial Statements by Local Governments and Their Financial Behavior

The reform of local government accounting systems has been advanced with the aim of reforming assets and liabilities, among other purposes, but studies in Japan that have quantitatively analyzed the effects of this reform has focused only on whether financial statements are prepared. This paper conducts an empirical analysis on the effects of the reform of local government accounting systems, which the Ministry of Internal Affairs and Communication has been leading since 2006, by focusing not only on whether financial statements are prepared, but also on the preparation of fixed asset ledgers and how the financial statements that are drawn up are utilized. The results of the analysis carried out using panel data of municipalities from 2010 to 2014 or from 2011 to 2015, showed that the use of financial statements by local governments to set fiscal management targets is effective in controlling the increase in primary expenditures in such local governments, and that the preparation of fixed asset ledgers by local governments as a part of the process of preparing financial statements is effective in controlling the rise in expenditures on ordinary construction works.

Keywords: reform of local government accounting systems, local expenditures, asset management, use of financial statements

JEL Classification：H72，H83

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Empirical Analysis of the Impact of the Length of a Governor’s Tenure on Local Expenditures—Focusing on Differences in Governors’ Attributes and the Timing of Assuming Office

Although many discussions have been held through previous research on the relationship between the length of a politician’s tenure and fiscal management, there is controversy about whether the impact is positive or negative. As much of the previous research analyzing fiscal management by Japan’s local governments involved verification based on data up till the early 2000s, it is also difficult to say if discussions have been conducted with due consideration for the changes surrounding the environment of local finances that occurred around 2000.
　The purpose of this research is to empirically clarify the relationship between a governor’s tenure and local expenditures by using panel data on prefectural governments from 1975 to 2017, in order to address such issues with existing research. To do so, we conducted an empirical analysis that focused on the possibility of differences in the relationship between local expenditures and a governor’s tenure before and after 2000, or on the possibility of differences in this relationship arising from the governor’s attributes and the timing when they assumed office.
　We drew the following three conclusions from the empirical analysis. Firstly, while the overall data (1975–2017) did not show that a longer tenure for the governor is related to greater restraint on local expenditures, this trend of restraint was identified for 2000 and after. It is inferred that this relationship was more strongly impacted by the enforcement of the Comprehensive Decentralization Law in 2000. This study also confirmed that the impact of the length of a governor’s tenure on local expenditures, observed for 2000 and after, gives rise to different effects depending on the attributes related to the governor’s background. Furthermore, it showed that the effects caused by differences in the governor’s background varied depending on whether or not a new governor assumed office after 2000.
　The conclusions drawn include several points that have not been elucidated in existing research to date or points that differ from the views presented in existing research, as well as a number of suggestions. Based on these results, there is a need to conduct more in-depth research in the future about the effects of the length of a governor’s tenure and how the related systems work.

Keywords: restraints on local expenditures, length of a governor’s tenure, differences in governor’s attributes, differences in timing for assumption of office

JEL Classification：H70, H72

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Impact of Corruption Revelations on Expenditures―Empirical Analysis Based on Prefectural Data in Japan

Corruption is a mechanism for individuals with budgetary authority to gain profits on an individual basis, instead of directing or allocating profits (funds) to a specific organization. It is incompatible with public interest and distorts the efficient allocation of resources across society as a whole. Especially, there are two cases of emerging wasteful expenditure. First, total expenditures increase when allocating new funds. Second, when funds for specific fields increase, fund allocation may become inefficient. This paper uses statistical data to examine the relationship between the presence of corruption and increase in expenditures, while paying attention to the fact that the presence of corruption is not known until it comes to light.
　Much of the previous research uses cross-country data, which has limitations in that it fails to account for the differences in fiscal systems between countries. In view of that, the novelty of this paper lies in its use of Japan’s domestic data. For the first time, this paper uses data on prefectures in Japan to verify the impact that revelations of corruption have on expenditures (total expenditures, civil engineering budget, and bid acceptance rate).
　The estimated results show that there is a possibility that expenditures are restrained after revelations of corruption. In addition, the analysis on the impact of revelations of corruption from the political situation suggested that the effect of expenditure reduction from revelations of corruption tends to be more restrained among local governments with governors who received a high percentage of votes in the elections (low percentage of votes for other competing candidates). These results imply that, depending on the political structure, revelations of corruption do not necessarily lead to immediate cuts in expenditure, and that attention should also be given to the actions of governors.

Keywords: corruption, expenditures, politics, empirical analysis

JEL Classification：D72，D73，H72

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Policy Evaluation of Wide-Area Cooperation between Municipalities― Empirical Analysis with “Self-support settlement region framework” as the Case Study

 This paper aims to quantitatively verify the outcomes of the “self-support settlement region framework” concept, which is a wide-area collaboration initiative between municipalities in Japan. Intermunicipal cooperation (IMC) has two effects. The first is that improvements in the efficiency of resource allocation for the supply of public services (internalization of economic externalities) are expected to contribute to an increase in the number of residents, or halt the decline in the number of residents, through improved daily life functions across the whole area. The second effect is an anticipated decline in the average cost of public services through economies of scale. In view of this, this paper uses the rates of population change and social change as performance indicators for the former, and real expenditure per capita as the performance indicator for the latter, to estimate the impact (causal effect) that the formation of “self-support settlement region framework” has on such performance indicators. However, as the formation of “self-support settlement region framework” is based on voluntary decision-making by the municipalities, areas that are experiencing a serious population decline may be more likely to select the formation of such areas in order to strengthen the sustainability of their community through area-wide initiatives. To avoid this selection bias, we combined the use of propensity score matching (PSM) and difference-in-difference (DID) analysis to eliminate municipality-specific effects that do not change over time. The analysis showed that the formation of “self-support settlement region framework,” compared to the non-formation of such areas, did not contribute to increasing or maintaining population numbers. Moreover, real expenditure per capita did not decrease after the formation of “self-support settlement region framework,” but rather, demonstrated an upward trend. While a core city in the “self-support settlement region framework” should have facilitated consensus building and adjustment of interests with surrounding municipalities, in reality, the cooperation remained along the lines of conventional cooperation without extending beyond easily collaborative fields, such as industrial policy, tourism promotion, and disaster measures. Consequently, improvements to the daily life functions and economies of scale across the whole of the area were not realized, and the “self-support settlement region framework” did not ultimately contribute to maintaining or increasing population numbers, nor to reducing expenditures.

Keywords: “self-support settlement region framework,” economies of scale, intermunicipal cooperation, propensity score matching (PSM)

JEL Classification：H72，H73，H77

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The Impact of deterioration and Fee Structure on Water Tariffs

The purpose of this paper is to empirically clarify how the aging of water pipelines and the declining population are reflected in household water charges, and also whether the differences in charge system such as water charges based on caliber of water pipelines or water charges based on purpose of water use, are a factor in generating disparities in water charges. The following facts are obtained from the verification using panel data.
　Firstly, household water charges are significantly higher for water utilities with a higher percentage of aging water pipelines, but the parameter is very small, close to zero. This suggests that the setting and revision of water charges with an eye toward ageing pipelines are not functioning. Secondly, household water charges are higher among water utilities that adopt water charges based on caliber of water pipelines as compared to those that follow water charges based on purpose of water use. Furthermore, it is confirmed that the higher the proportion of aged pipelines, the higher the water charges in caliber-based water utilities. In other words, due to the presence of a clearly distinct “household charges” category, water utilities that follow water charges based on purpose of water use may find it difficult to make decisions for fear of opposition to setting or revising household water charges to a high level. Thirdly, water utilities that adopt water charges based on caliber of water pipelines are found to have high profitability, while usage-based water utilities have low profitability.
　As local public enterprises, water utilities, follow self-supporting accounting systems in principle, and are required to set or revise water charges to match the cost. By adopting a usage-based charge system, a situation in which water charges differ depending on what the water is used for implies that the setting of charges to match the cost is not functioning. A usage-based charge system is considered to be an institutional factor that hinders the setting and revision of water charges to an appropriate level in view of the aging of facilities and business earnings. Hence, from the perspective of sustainability, it is desirable to introduce a caliber-based charge system.

Keywords: local public enterprises, water utilities, aging infrastructure, water charges systems

JEL Classification：H44，H54，H76，L95

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