In a move toward greater local autonomy, a government panel has submitted a report to Prime Minister Junichiro Koizumi calling for large cuts in state subsidies to local governments, including a reduction in government payments for public education. Currently the central government pays half of the salaries for public-school teachers, provided that the standard size of a class -- 40 students -- is maintained.

The report from the Commission for Local Decentralization and Reform says the central government should allow local governments to use state subsidies as they like. Specifically, education subsidies (2.657 trillion yen) and day-care center operating expenses (42.3 billion yen) would be reclassified as "general revenues" with no strings attached. Additionally, subsidies for municipal public-works projects (5.125 trillion yen) would be either scrapped or slashed.

State subsidies have been used as means of extending central-government authority to local governments not only in public education and investment but also in other vital areas of administration. Revamping the complex system of subsidies is, therefore, essential to decentralization, which is an important item on the Koizumi administration's structural reform agenda.

The question is how to promote decentralization in an integrated manner. On this score, the administration has yet to iron out its internal differences. Last month, for instance, the prime minister ordered the Council on Economic and Fiscal Policy to discuss ways of shifting more tax revenues to local governments. However, the Finance Ministry opposed the proposal, saying the issue of subsidies should be discussed first.

The report itself refers to instances of internal discord. The Ministry of Health, Labor and Welfare is resisting plans to change rules requiring day-care centers to install specified cooking equipment, or health-center heads be licensed physicians. The proposal for "prior consultations" over state-managed public-works projects -- a proposal advanced by local governments that foot part of the bill for these projects -- has received a cool reception from the Ministry of Land, Infrastructure and Transport.

It should be noted, however, that decentralization has already made significant progress in selected areas of routine administrative work in which central offices in Tokyo once held control while relegating implementation to local governments. But it is also true that the central bureaucracy still maintains an array of powers and regulations that stifle local autonomy.

The fiscal 2003 government budget includes various types of subsidies totaling about 17.5 trillion yen. Those related to social security amount to 10.7 trillion yen, or 61.2 percent of the total. Next comes education and science (18.1 percent), followed by public-works projects (16.6 percent). These three categories account for most of the subsidies.

Experience shows, however, that cutting these grants does not necessarily mean giving free fiscal rein to local administrations. Last June, the Cabinet decided to make a cut on the order of "several trillion yen." For a start, payments for fiscal 2003 have been reduced by 560 billion yen, including 230 billion yen in education subsidies. However, the 230-billion yen cut frees money only for pension benefits and retirement allowances, not for teachers' salaries. That leaves schools with little extra money for hiring new teachers needed to maintain smaller classes.

The commission hopes the report will give a further impetus to decentralization. However, it won't be easy to move government offices anxious to preserve their privileges. Last autumn, for example, plans to trim subsidies to public schools fell through because of stiff resistance from the Ministry of Education, Culture, Sports, Science and Technology.

The health and education ministries are engaged in turf wars over a proposal to integrate kindergartens and day-care centers. With the birth rate falling, kindergartens with fewer pupils are also serving as day-care centers for children from double-income families. In some deficit-ridden districts, public kindergartens and day-care facilities have been combined to reduce operating expenses

The latest report provides a launch pad for a detailed government program to streamline the bloated system of subsidies. Agreement will be hard to come by, given a complex web of vested interests involving government ministries and agencies as well as politicians concerned with subsidized projects. But there is no question that the future of the Koizumi administration depends in part on how it addresses the issue of state subsidies.