Intergovernmental grants and distributional issues : the case of Japan

Abstract

This thesis examines the distribution of Japanese intergovernmental grants from the central government to local governments, including prefectural governments and local municipalities. In 1991, 40.5 per cent of the Japanese central budget was apportioned to local governments in the form of grants; intergovernmental grants made up 38.5 per cent of the discretionary resources of local governments. Intergovernmental grants are provided in various forms - as specific purpose grants, local allocation tax and local transfer tax - depending on their economic and political purposes. The distribution of these grants reflects the interests of bodies involved in public choice, such as the bureaucracy, politicians, local governments and voters, and contributes to social and economic welfare. Many studies have analysed the effects of intergovernmental grants on local public finance in Japan. However, the application of conventional economic theory on public finance to the case of Japan has its limitations. Conventional economic theory normally adopts a centralised, top-down view of the public choice process, assuming perfect foresight on the part of policy decision-makers. This simple framework for analysis undervalues the role played by political conflict and interplay between decision-making bodies in the arena of intergovernmental grants. These characteristics of the public choice process are significant in deciding the level of grants in pluralist democratic countries, including Japan and other OECD nations. This thesis provides positive analysis of intergovernmental grants taking these characteristics of the public choice process into account. It specifically incorporates the roles of decision-making individuals and groups into the economic analysis and examines how and to what extent political interaction between these groups and individuals affects the distribution of intergovernmental grants. The thesis looks at three areas: lateral political competition in the distribution of specific purpose grants; the long-term income redistribution function of local allocation tax; and fiscal equalisation and the electorate. These case studies highlight the significance of political conflict and interplay among decision-making bodies involved in public choice process and the role they play in the distribution of intergovernmental grants. The case studies take up the following issues: local autonomy and the role of local pressure groups; financial interdependence between the central government and local governments; and the role elections play in the distribution of intergovernmental grants. The results suggest that political interaction plays a decisive role in the distribution of intergovernmental grants in Japan. It may also be an important factor in understanding the distribution of intergovernmental grants in other OECD countries. Show more