With Japan’s public debt snowballing, the government is gearing up efforts to review national and local-level finances under what has been dubbed the “Trinity Re- forms” plan. But with differences within the government still unresolved, there is little likelihood of a conclusion in the near future.

Q. What are the Trinity Reforms?

A. Prime Minister Junichiro Koizumi plans to carry out three reforms at the same time: reducing national subsidies to local governments; transferring some of its tax revenue sources to those local authorities; and reviewing its tax grants to them.

The reforms are intended to slim down the budget deficits of both the central and local governments while promoting decentralization. Koizumi sees the package as part of his structural reform initiatives.

Q. Why is the government trying to decentralize tax revenues?

A. Because it wants local governments to stand on their own feet. Too much money in the form of subsidies and tax grants to municipalities pamper them, it believes. If each local authority has to raise its own revenue, this will reduce unnecessary projects for roads and infrastructure, for example, and result in slimmer budgets.

Q. How would the central government shift its tax revenues?

A. Some Cabinet members, for example, have agreed to reduce the national income tax to provide more scope for municipalities to raise residency taxes.

Q. Why did the changes cause a rift among Cabinet members?

A. Because interests differ among ministries. The Public Management, Home Affairs, Posts and Telecommunications Ministry, which is in charge of local administration, wants to put priority on the transfer of tax-raising powers. The Finance Ministry, on the other hand, hopes to reduce subsidies and tax grants because it is the guardian of the national coffers.

Finance Minister Masajuro Shiokawa has recently compromised by offering to give up part of national tax revenues, but the Cabinet has yet to agree on how much the central government will surrender.

Meanwhile, ministers with responsibility for other areas, such as education, transportation and the police, are eager to retain their influence over local administrations by providing subsidies.

Q. Why do local governors strongly oppose the way the reform is being discussed?

A. They criticize the central government for only attempting to cut subsidies and tax grants without handing over part of the tax revenue in return. They say that would only leave them short of revenue.

Their anger was fueled by a report issued last week by the Council for Decentralization Reform, an advisory panel to the prime minister, that calls for subsidies and tax grants to be cut, but does not clearly suggest transferring tax revenue sources.

Q. How much does the central government provide to local bodies in subsidies and how are they spent?

A. In fiscal 2003, subsidies are expected to top 17 trillion yen. They are to be used for public services, including works projects, education and welfare.

Q. Is the money different from tax grants from the central government?

A. Subsidies are supposed to be spent for certain purposes, while tax grants do not have such limits. Tax grants are provided to municipalities that lack revenue.

About 20 trillion yen in tax grants are provided every year.

Q. What will the government decide to do and what is the time schedule?

A. The government aims to release a Trinity Reforms blueprint by the end of this month, but it is not yet clear whether the government will be able to announce any numerical targets.

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