In this article, Dr Greg Stride, from the LGIU’s Local Democracy Research Centre, picks out some key lessons from our recent report on local government finance in Japan.
English local government finances are in a bad way. Our 2023 finance survey found that only 14% of senior council figures are confident in the sustainability of council finances, and it’s easy to see why. Earlier this year, Professor Kevin Muldoon-Smith from the University of Northumbria and his team of experts published a systematic review of the limitations of local government finance in England. The results were stark. A combination of reduced grants, limited local control over revenue-raising, funding unrelated to need and reliance on competitive bids have combined to make a system that is not fit for purpose.
So far, so bleak. But Kevin and his team didn’t stop there. They’re not only interested in telling the story of how bad things are in England, they also want to understand how the state of local government finance could be better. To that end, they have published excellent reports on Germany, Italy, and most recently Japan, aiming to conclude on how each country’s system works and whether there is anything about how they fund local government that could be usefully transferred to England.
As it turns out, there’s a lot to learn. The reports on these three countries (as well as the reflections of our very own Dr Seán Ó Riordáin) make it clear just how much of an outlier England is, in how constrained and fragile local government finances are. There are many lessons we can learn from these other countries, all of which are dealing with some of the same pressures as England, such as a rapidly ageing population.
In this article, we will just focus on Japan (our most recently released report) and ask what lessons on local government finances we should be taking from this powerful report.
1. Change is possible
Japanese local government was significantly reformed in the early 2000s through the Trinity Reforms. The system before these reforms was criticised for its excessive centralisation and its failure to prevent major failings in local government finances, such as when the city of Yubari experienced insolvency in 2007, with debts of 35bn JPY against an annual budget of only 4bn JPY.
Does this sound familiar?
If it does, then consider the conclusion that led to the Trinity Reforms:
“The underlying rationale in the promotion of the ‘Trinity Reform’ was the belief that one of the central root causes of severe local government financial distress lies in the weak capacity of local government to generate and/or have discretion over its own tax revenue and income.” (p.23)
It’s probably fair to say that the debate has not reached this conclusion yet in England, but if it can in Japan, then there has to be a chance that it can here.
2. Early warnings are the most useful warnings
Before the Trinity Reforms, Japanese local government finance was severely criticised for lacking a ‘yellow card’ system. The system they had could only respond once a local government was in severe financial trouble, as with Yubari. The result was that central government would only intervene once it was already too late, and a major fiscal reconstruction was necessary.
In England, we’re in a similar situation. The section 114 process allows a council to declare that it won’t be able to set a balanced budget, at which point central government will intervene, usually by sending in commissioners to run the authority. This means there is limited space for interventions to take place before it becomes too late to save a council from impending financial collapse. A yellow card system could solve this problem. It could also mean that the main story about council finances could move away from the narrow focus on councils issuing 114 notices. As the report usefully concludes:
“a ‘yellow card’ system could reveal the potentially much bigger problem of those local authorities who are just about remaining solvent but exist on the permanent margin of viability and increasingly constrained ability to deliver public services.” (p.24)
3. Variety is the spice of local government finance
In England, local councils are constrained by their very limited number of ways of raising revenue. They can use council tax, business rates, limited fees and charges, commercial income and central government grants. Apart from those – all of which are severely constrained – there are very few levers English local government can pull to raise revenue when they need to.
In Japan, however, local governments have a much more diverse array of ways to raise money. There are over 20 local taxes, together with a Local Allocation Tax to make up for shortfalls in income for authorities unable to raise the required amount.
This allows local governments to raise more when they need to and avoids the risks associated with relying on a single income stream.
The report has many more useful lessons, including how the system in Japan deals with the question of territorial equalisation, how they assure councils get enough funds to meet their needs, and how local government finances are scrutinised. I would recommend everybody interested in local government finance read the report, as well as the other reports on Italy and Germany, to see how other countries have effectively met the challenge of financing local government.
If you are an LGIU member interested in local government finance, please sign up for our upcoming talk on the state of local government finance in England, where I will be talking through our latest survey results.
If you have any other questions, or just want to talk about local government, please contact me at [email protected].