Local governments in Japan, like the central government, are heavily in debt. The deficit problem is adding to difficulties in budget talks between the Finance and Internal Affairs ministries. The key question is how much national tax revenue should be transferred to local administrations in fiscal 2005.
The question is being addressed as part of three-way fiscal reform involving the central and local governments. The so-called "trinity reform" is aimed at improving the revenue-sharing system, cutting state subsidies and shifting more tax-collecting authority to local administrations.
The Finance Ministry is trying to reduce revenue transfers amid stiff resistance from local governments. The central government is required by law to make these payments each year to help stabilize local-government finances. This money, unlike subsidies, has practically no strings attached. As fiscal discipline is a common denominator in the budget talks, the ministries need to draw up fiscal guidelines for local governments to keep revenue transfers for fiscal 2005 at a reasonable level.