The internal affairs ministry has disclosed the financial health of the nation's local governments gauged by four indicators based on a 2007 law to prevent bankruptcy of local governments. All 47 prefectural governments have passed the test based on their fiscal 2007 account settlements. But the cities of Yubari and Akabira in Hokkaido and the village of Otaki in Nagano Prefecture are bankrupt and 40 municipalities, including the city of Wakayama, are nearly bankrupt.
The check this time was on a trial basis. After the fiscal 2008 account settlement the law will be put to actual use. Near-bankrupt local governments must work out a financial reconstruction plan and accept external auditing. Bankrupt local governments will be subjected to the state's strict supervision, including a cap on the amount of bonds that can be issued.
All local governments are enduring severe financial conditions. Such local governments should halt wasteful uses of money and fully explain to their assemblies and residents the real situation, including the fiscal conditions of public enterprises and third-sector companies. The internal affairs ministry's findings show that many municipalities have incurred debts from the operation of such public facilities and services as hospitals, sewage systems, tourism facilities and subway lines. Of course, minimum necessary services such as medical care should not be denied to local residents in the name of financial reconstruction.
One of the factors behind their difficult financial conditions was the reform policy under the administration of former Prime Minister Junichiro Koizumi. From fiscal 2004 through fiscal 2006, grants-in-aid from tax money to the local governments were reduced by ¥5.1 trillion. Public-works projects that generate money for local economies were also reduced.
The central government should seriously consider transferring more tax revenue sources to local governments to help them regain their financial health.