OVERVIEW OF TOKYO

TOKYO'S FINANCIAL SYSTEM

Financial Structure of Local Governments in Japan

The administrative system of Japan has a three-tiered structure: the top tier is the national government, and below that are the two tiers of local governments—prefectures and municipalities.

With the exception of administrative functions such as foreign relations and national defense, most of the administrative functions are financed both by the national government and local governments. Many of the national policies and programs are carried out by local governments.

In fiscal 2007, net total expenditure by the national government and local governments amounted to 61.3556 trillion yen and 87.8820 trillion yen, respectively. The scale of expenditure by local governments reached approximately 1.4 times that of the national government; this figure shows how extensive a role local governments play in the public administration of Japan.

The total amount of tax collected in fiscal 2007 was 92.9226 trillion yen, of which national taxes accounted for 56.7% and local taxes, 43.3%. However, the ultimate allocation of this revenue was 29.4% to the national government and 70.6% to the local governments. This is because over 50% of the taxes collected as national tax are redistributed to local governments through systems such as the local allocation taxes, local transfer taxes, national treasury disbursements, and special grants to local governments.

Structure of Local Finance in Japan (Unit: 100 millions, FY2007)

Revenue

Revenue for local governments from local taxes, which are resources proper to the local governments, accounted for 44.2% of their total revenue in fiscal 2007. The revenue granted to local governments by the national government included local transfer tax (0.8% of the total revenue), local allocation tax (16.7%), and national treasury disbursements (11.3%). Revenue from the issue of local bonds accounted for 10.5%.

In more detail, the sources of revenue for local governments are as follows:

- Local Taxes

These are collected by local governments, and the spending of this revenue is not earmarked. It is the key source of revenue for local governments to carry out policies that meet local needs.

- Local Transfer Taxes

This is the generic name applied to the transfer taxes of local roads, petroleum and gas, special tonnage, automobile weight, and aircraft fuel. These constitute transfers of a fixed proportion of the relevant national taxes to local governments. With the exception of the special tonnage transfer tax, the uses of such revenues are comprehensive but specified, such as for roads and airports and their surrounding areas. The income transfer tax was abolished in fiscal 2006 due to the transfer of tax sources from national income tax to local individual inhabitant tax. The local roads transfer tax has been renamed the local gasoline transfer tax from fiscal 2009.

- Local Allocation Taxes

These taxes form the core of the local financial adjustment system of the nation. The system is designed to sustain general revenue sources and to correct fiscal imbalance among local governments, thereby ensuring that all local governments are able to provide an adequate level of services. This general revenue source consists of grants to local governments calculated by a fixed formula, which allocates a percentage of revenues collected nationally. The percentage of revenue allocated to local governments is 32% of income tax, 32% of liquor tax, 34% of corporation tax, 29.5% of consumption tax, and 25% of tobacco tax.

- National Treasury Disbursements

These include allotments disbursed by the national government to local governments on the basis of the cost allotment classifcations of the national government and local governments; mandatory cost sharing; and subsidies for the promotion of specific policies and support for public finances, etc.

- Local Bonds

This is revenue from bonds issued by local governments to defray the cost of constructing public facilities such as roads and schools. These are costs that should be spread over a number of years to have generations of residents benefitting from their construction share the burden equally.

Distribution of Taxes (Unit: 100 million)

* N.B. National Treasury Disbursements include special grants for traffic safety measures and subsidies provided to municipalities where national facilities are located.

Expenditure

The breakdown by administrative categories of expenditure of local financial resources during fiscal 2007 shows social welfare accounting for 19.0%, followed by education at 18.4%, civil engineering works at 15.0%, and general services at 10.0%. Social welfare and education combined amounted to about 37% of total expenditure.

The main items of expenditure of local governments are as follows:

- Social Welfare

This expenditure provides social welfare services, including the development and operation of welfare facilities for children, the elderly, and people with disabilities, and serves to implement programs to provide public assistance, etc.

- Public Health and Sanitation

The purpose of this expenditure is to maintain and promote the health of residents and improve the living environment. Funds go to carry out various medical policies, public health and mental health programs, sewage treatment, refuse collection and disposal, and measures to control pollution.

- Agriculture, Forestry, and Fisheries

The purpose of this expenditure is to promote agriculture, forestry, and fisheries, and to maintain a stable supply of foods. Funds go to develop the production infrastructure, improve the industrial structure, take measures related to consumption and distribution, and develop and promote agricultural, forestry, and fisheries technologies.

- Commerce and Industry

This expenditure is for the promotion of local commerce and industry, and to help companies update and streamline operations. Funds go to guide and develop small and medium-sized enterprises, to attract companies to local areas, and to carry out consumption and distribution measures, among others.

- Civil Engineering Works

This expenditure is for development of the local living environment and urban infrastructure. Funds go to construct, develop, and maintain public facilities such as roads, rivers, housing, and parks.

- Education

Education is one of the basic administrative areas of local governments. Expenditure is made toward furthering education and culture through schools and social education programs.

- Debt Services

This expenditure is made for the redemption of capital and interest from the issue of local bonds.