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The Diet in the last session enacted a law designed to prevent bankruptcy of local governments like that of Yubari city in Hokkaido. The law became necessary because many local governments suffer from a similar deterioration of finances.

The law introduces four indicators to gauge the health of local governments’ financial conditions. It adopts a two-stage approach. If the indicators slip a certain degree below standards set by the internal affairs ministry, the local government concerned will be required to work out a plan to put its finances on a sound footing. If the indicators fall further, the local government will enter a rehabilitation stage and be obliged to work out a financial rehabilitation plan. A limit will also be set on the amount of bonds it can issue.

Although the internal affairs ministry is to draw up the standards, it must carefully take into consideration the opinions of local governments. Too strict standards will lead to a deterioration of local services such as education, city water, sewerage, garbage collection and health care, including the operation of publicly run hospitals.

The ministry also must consider the fact that for the past three years, tax-funded grants-in-aid from the central to local governments have dropped by about 5 trillion yen, causing financial difficulties for many local governments.

Local governments will start making public the indicators in the settlement of accounts for fiscal 2007. This means that the role of local assemblies and residents will become important in monitoring local governments’ financial discipline.

The indicators will show the ratio of deficit to standard revenue, the deficit on a consolidated basis (including the financial conditions of publicly run enterprises and third-sector entities), the debt amounts to be repaid in the year, and the total amount of outstanding debt on a consolidated basis.

Local governments must exercise greater prudence in their spending and borrowing. And the central government must make sure that local governments do not lose their vitality.

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