Prime Minister Junichiro Koizumi will retain 1 trillion yen in cuts in national subsidies for fiscal 2005, government sources said.
The move is designed to demonstrate Koizumi's initiative by setting a numerical target for a three-pronged fiscal and tax reform effort to make local governments more financially independent.
The reforms consist of cuts in subsidies and tax grants from the national government to local authorities and a transfer of taxation authority to local governments from the national government.
Koizumi has pledged to slash 4 trillion yen in subsidies in three years, beginning in fiscal 2004, in exchange for a transfer of tax collection power to local governments.
But how to implement such reductions and which tax authorities should be transferred remain undecided for fiscal 2005 and 2006.
Under the fiscal 2004 budget, the national government is to cut subsidies to local governments to 20.4 trillion yen from 21.4 trillion yen.
Government ministries are wrangling over how to reduce subsidies under the fiscal 2004 budget.