Smaller pieces of the pie

The Abe administration in its fiscal 2013 budget has reduced the amount of grants from the central government to local governments by ¥390 billion from the amount given in the initial fiscal 2012 budget. The reduction is the first in six years and is coupled with the central government’s call for local governments to lower wages for local public servants to the level of national public servants.

The new government led by the Liberal Democratic Party and Komeito is clearly making an effort to differentiate its policies from those of the preceding Democratic Party of Japan government, which had increased such grants for three consecutive years in the name of pushing devolution.

The move shows the Abe administration’s readiness to decrease the grants, which constitute a large portion of the budget along with social welfare spending, in its attempt to restore the health of state finances. But it should not forget that the grants are funds set aside for local governments and play the role of equalizing the imbalance among financially strong and weak local governments.

In February 2012, the Diet passed a special law to slash wages for central government workers by an average 7.8 percent for two years through the end of fiscal 2013. The central government does not have power to order local governments to lower wages for their workers. The law only requested that local governments take a “voluntary and appropriate response” in connection with the wage levels of local civil servants. Local governments set the levels of wages for their workers in accordance with comparisons between their wage levels and those of local private sector workers.

Thinking that it is problematic that local government workers earn more than central government workers, the Abe administration has put out the call to the associations of prefectural governors and other heads of local governments to reduce wages for local civil servants. About one-quarter of spending by local governments is used to pay for wages for their workers.

In recent years, the balance of outstanding long-term bonds issued by local governments has been stable while the financial conditions of the central government are deteriorating rapidly. This is partly due to the central government’s attempt to make up for shortfalls in local governments’ finances by issuing bonds. It is likely that it will try to further reduce grants to local governments in and after fiscal 2014.

Local governments had no alternative but to accept the reduction of the grants in the fiscal 2013 budget because the central government promised to keep the amount of funds to be used by local governments for ordinary administrative services at the fiscal 2012 level. But the lowering of wages for local civil servants could make it difficult for local governments to secure the human resources needed to maintain the quality of services.

The central government should devise a way to financially reward local governments that have already cut wages for their workers in an attempt to attain financial health.