Local government financial difficulties: The “Standard Fiscal Demand” calculation formula needs revision!

Hirokazu Kobayashi

CEO, Green Insight Japan, Inc.

Professor Emeritus and Visiting Professor, University of Shizuoka

I retired from the University of Shizuoka but continue to live in Shizuoka Prefecture. Shizuoka Prefecture is reportedly in financial trouble. The Department (Fiscal Affairs Division, October 2025) reports on its current fiscal condition. Calculations show that the Future Burden Ratio will be 234.1% (FY2024).

Future Burden Ratio = (Future Liabilities − Available Reserve Funds

− Projected Earmarked Revenues − Estimated Amount of Standard Fiscal Demand Included for Outstanding Local Government Bonds) / (Standard Fiscal Scale

− Amount of Debt Service Costs Covered by Local Allocation Tax)

Where:

Future Liabilities: Future financial obligations, including outstanding local government bonds and contingent liabilities arising from debt service commitments.

Available Reserve Funds: The balance of reserve funds that can be allocated to cover future financial obligations.

Projected Earmarked Revenues: Projected earmarked revenues that can be used to offset future liabilities, such as national government subsidies, user charges, and shared or contributed revenues.

Estimated Amount of Standard Fiscal Demand Included for Outstanding Local Government Bonds: This includes special local bonds such as Temporary Fiscal Measures Bonds and other local government bonds with a high local allocation tax inclusion rate.

Standard Fiscal Scale = Standard Tax Revenue + Ordinary Local Allocation Tax

+ Eligible Issuance Amount of Temporary Fiscal Measures Bonds

Standard Fiscal Scale: An indicator representing the standard fiscal capacity of a local government.

Debt Service Costs Covered by Local Allocation Tax: Debt service costs for local government bonds that are compensated through the Local Allocation Tax system.

Ordinary Local Allocation Tax = Standard Fiscal Demand − Standard Fiscal Revenue

Standard Fiscal Demand: The amount of fiscal resources estimated by the national government to be required for a local government to provide standard administrative services.

Standard Fiscal Revenue ≈ 75% of Standard Local Tax Revenue

+ Local Allocation Tax Grants

Local Allocation Tax Grants: Taxes collected as national taxes, a portion of which is redistributed by the national government to local governments according to statutory allocation criteria.

Underlined, Funding sources primarily derived from national taxes; Italicized, Funding sources partially derived from national taxes

Let's look at the Future Burden Ratios across Japan (reference values recalculated using publicly available data).

Future Burden Ratio (FY2023)

Nationwide (Prefectures): 172.9%

Shizuoka Prefecture: 242.5%

Highest Prefectures

Hyogo Prefecture: 338.8%

Hokkaido Prefecture: 326.9%

Niigata Prefecture: 326.7%

Kyoto Prefecture: 292.9%

Lowest Prefectures

Chiba Prefecture: 140.1%

Kanagawa Prefecture: 114.6%

Tokyo Metropolis: 23.6%

In the Future Burden Ratio calculation formula, the underlined funding sources are financed by national tax revenues. They are reflected in the calculation of the Standard Fiscal Demand for each prefecture. This formula incorporates factors such as population, number of elderly residents, area, road length, and number of schools. Tokyo, with its exceptionally low Future Burden Ratio, yields a negative right-hand side in the formula for calculating the Ordinary Local Allocation Tax and therefore receives no allocation tax. Nevertheless, it hosts a concentration of corporate headquarters and generates substantial tax revenue relative to its infrastructure development costs. For other prefectures, the relationship between the Future Burden Ratio and local administrative conditions is less straightforward. However, prefectures with a high Future Burden Ratio share a distinct common feature: they possess transit or supply-type infrastructure. Shizuoka Prefecture is a transit point for Tokaido logistics connecting Tokyo and Osaka; Hyogo Prefecture is a junction for national trunk lines; Hokkaido has a vast land area; and Niigata Prefecture is a key hub for logistics on the Sea of Japan coast. Furthermore, Kyoto Prefecture is a national hub for tourism and culture. In other words, while funding these infrastructure projects is costly, these costs are not accounted for in the Standard Fiscal Demand calculation. Although the Standard Fiscal Demand formula is considered revisable, its basic structure was established in the 1960s. While partial revisions and the addition of adjustment coefficients have occurred since then, a substantial revision of the Standard Fiscal Demand calculation standards to align with current realities is desirable.

For example, the Shizuoka section of the New Tomei Expressway was constructed with three lanes, whereas the Aichi section has two lanes. This reflects Shizuoka Prefecture's greater role as a national trunk line supporting nationwide logistics and disaster response. The construction costs for the expressway itself are borne by the national government and the expressway company, limiting the prefecture's direct fiscal burden. However, from a disaster-response perspective, Shizuoka Prefecture's preferences were incorporated during the design phase, resulting in the installation of facilities such as heliports. Shizuoka Prefecture bears an indirect burden through the surrounding infrastructure. In other words, while the Standard Fiscal Demand provides some adjustment, it is difficult to say that it adequately evaluates the structural burden imposed by transit- and supply-type infrastructure. From the perspective of the proactive fiscal policy currently under discussion within the government, revising the criteria for the Standard Fiscal Demand calculation may therefore warrant serious consideration.

Footnote: Generative AI (ChatGPT 5.2) was used as a supplementary tool for numerical verification and institutional clarification—all interpretations, conclusions, and responsibility for the content rest solely with the author.