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Centre for Cities recently visited Tokyo, Sendai, and Onagawa Town through the Japan Local Government Centre on the Japan Study Tour to find out more about how cities function in one of the most urbanised countries on the planet – and what we can learn from them here in the UK.
This is the first in a blog series summarising lessons from the study tour for local government funding and finance. Future pieces will examine Japan’s economic geography and housing policy.
How we pay for our local government services is a hot political issue due to the Government’s commitment to devolution and restrictions on council spending, especially in cities. Although local government in Japan is organised rather differently to how it currently is in the UK, Japan’s model shows that it possible to combine greater devolution of taxation with well-funded local government across the country.
Japanese local government has three distinct characteristics. Though Japan is a unitary state, local government’s independence is constitutionally guaranteed; it possesses a uniform two-tier structure between the municipality and the regional prefecture throughout Japan; and it provides most public services with central government reserved to providing pensions, defence, and other national responsibilities.
Keen observers will notice that across Britain the opposite of these three principles applies in local government. This is not necessarily a good or bad thing – it means that Japanese local authorities have clear and consistent responsibilities, but there is little opportunity for bespoke arrangements as the UK has with the new metro mayors.
Overall though, Japan has greater devolution than the UK, as local government has both more power and more freedom to act how it chooses.
But despite these differences, the same debates play out in Japan as they do in British local government: How do we balance local government’s fiscal autonomy and local taxation’s incentives with a commitment to uniform well-funded and well-run public services across the country?
With the Comprehensive Spending Review around the corner, how Japan funds local services is relevant to the ongoing political debates in the UK about devolution and austerity.
Local taxation in Japan covered roughly 38 per cent of all local government spending in 2015, or ¥39 trillion (£267bn). This is a similar share to how local government in England is funded and the IFS has identified local taxes as meeting 32 per cent of local government spending from 2017-18, or £43bn.
But Japan’s funding framework gives local government a much larger toolbox than the UK, partly because it has more responsibilities.
Local government in the UK can only levy two taxes– council tax and retained business rates, both of which are property-based.
Japan’s funding and finance model gives its local government much more flexibility. Japan has at least twenty-three local taxes, ranging from individual and business income and property taxes, to local taxes on tobacco, alcohol, vehicles, and golf courses. Rather than just taxing property, Japanese local taxes include a mix of income, asset, and consumption strands.
Japanese local government, therefore, has far more tax levers than local government in the UK, and far more freedom to set them at the levels which they choose.
But the same choices in local government funding policy, between incentivising economic growth through tax devolution and redistributing between richer and poorer cities, exist in Japan as they do in the UK. Funding and finance decisions cannot by themselves make geographic economic inequality disappear.
Japan addresses this in two ways – national treasury grants, and the local allocation tax. National treasury grants are equivalent to Britain’s government grants and are about ¥15 trillion (£103bn) or 15 per cent of all local government spending in Japan. These grants are linked to specific policies and programmes and local government has little say in how to use them.
But the Local Allocation Tax (LAT) is different – it’s local government getting a pre-determined share of certain national taxes. Slices of income tax and national alcohol duty, corporate tax, consumption tax, and the tobacco tax, amounting to ¥17 trillion (£117bn), are reserved for local government use. A formula to determine local need then redistributes these revenues across prefectures to provide 17 per cent of all local government funding, or ¥17 trillion (£116bn).
This differs to business rates redistribution as Japanese local government can spend LAT money how it wishes. Grants and the redistribution system in the UK are typically linked to policing and fire services, schools, or areas such as housing benefit. Due to greater devolution, Japanese local government has more freedom in raising local taxes and in using government grants than British local government does.
The LAT also avoids the complex system of the retention of growth in business rates that has been in place in England since 2010, as it uses multiple national taxes to achieve national redistribution goals rather than relying on a single tax on commercial property. This also makes local government’s funding and finance’s role in redistributing across the country clearer. Tokyo Metropolis (equivalent to Greater London) gets nothing from the LAT due to its strong economy and high local tax base, while Akita (a prefecture in the poorer North of Japan) gets almost 70 per cent of its funding from the LAT.
As pressure on local government services in Britain grows, the settlement that underpins council funding will need to be revisited. What Japan’s funding model for local government demonstrates for the UK’s local government funding debate is that it is possible to achieve both the devolution of taxation to encourage growth and an adequate level of funding across the country.
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