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 us examine the Future Burden Ratios across Japan, cited from the List of Key Financial Indicators for Local Governments, Fiscal Year 2024, Local Government Financial Survey Related Materials, Ministry of Internal Affairs and Communications (published in December 2025)

Future Burden Ratio (FY2024)

Nationwide average (prefectures): 144.1%

Highest (Top 6)

Hyogo: 311.3%

Hokkaido: 307.0%

Niigata: 287.0%

Kyoto: 257.2%

Fukuoka: 245.3%

Shizuoka: 234.1%

Lowest (Bottom 6)

Nara: 102.0%

Chiba: 101.3%

Aomori: 58.0%

Kanagawa: 54.5%

Okinawa: 24.2%

Tokyo: 13.6%

Tokyo has the lowest future burden ratio and a negative right-hand side in the formula used to calculate ordinary allocation tax amounts. This makes it a 'non-recipient entity' with zero allocation tax. Nevertheless, it is home to numerous corporate headquarters and generates substantial tax revenue relative to the infrastructure development costs it incurs. For other prefectures, the causal relationship between the future burden ratio and local administration is less apparent. However, a prefecture's 'future burden ratio' likely reflects not only the skill of its fiscal management but also the distribution of infrastructure and risk among the national government, the market, and local governments. The factors revealed by comparison can generally be organized and interpreted as follows. When the 'High Factors' are low, the result is low; when the 'Low Factors' are low, the result is high. That is, these factors are classified into ten categories. Prefectures with a 'future burden ratio' at the median value are those where none of these factors has a strong influence on the outcome. Although each prefecture may fit multiple criteria, only the primary criterion is used to designate the corresponding prefectures.

High ‘Future Burden Ratio’ Factor 1: Transit/Supply Infrastructure Burden (Transit Prefectures/Supply Prefectures).

This category includes prefectures that host 'transit/supply infrastructure' supporting national logistics, people flow, energy, and water resources. In these prefectures, local finances tend to bear the burden of maintenance, renewal, and disaster-prevention. Although users are distributed nationwide, maintenance responsibilities are concentrated at the prefectural level, resulting in a high future burden ratio. Applicable to: Hyogo Prefecture, Niigata Prefecture, Shizuoka Prefecture

High ‘Future Burden Ratio’ Factor 2: Burden of Regional Hub Functions (Undertaking Wide-Area Services)

This type involves the concentration of medical, educational, transportation, commercial, and administrative functions from surrounding areas, as well as the provision of urban infrastructure and services. While this attracts people and demand from a wide area, tax revenues may be dispersed to Tokyo or the national government, leaving the burden of accumulated debt. Applicable to: Kyoto Prefecture, Fukuoka Prefecture

High ‘Future Burden Ratio’ Factor 3: Wide Area, Low Density, Cold Climate + Debt Stock Accumulation Type

This type is characterized by vast, low-density, and cold regions, which tend to increase fixed costs for infrastructure maintenance and renewal. Additionally, prior public investment, driven by economic stimulus measures and deficit-covering bonds (e.g., administrative reform bonds and retirement allowance bonds), has resulted in a high local bond balance. Consequently, both the future burden ratio (stock) and the actual debt service ratio (flow) tend to be high simultaneously. Applicable: Hokkaido

Low ‘Future Burden Ratio’ Factor 1: National Direct Control/Tax Allocation Absorption Type (Effective 'Shifting Burden to the National Government')

Large-scale infrastructure and special policy burdens are often handled under national direct control or funded by national budgets. Additionally, high dependence on tax allocations means that, even if local bonds exist, the expected tax allocation (national subsidy) has a strong impact on the numerator of the future burden ratio. Note that a low future burden ratio does not necessarily indicate fiscal flexibility or self-reliance. Applicable: Okinawa Prefecture, Nara Prefecture

Low ‘Future Burden Ratio’ Factor 2: Heavy Flow, Light Stock (Early Redemption + Effectiveness of Tax Allocation Measures)

This factor highlights the difference between the effective debt service ratio (repayment burden = flow) and the future burden ratio (net future burden = stock). When a high proportion of local bonds involves accelerated repayment or anticipated tax allocation measures, the immediate repayment burden appears large, while the future net burden appears small. This factor can often explain prefectures with a relatively high effective debt service ratio but a low future burden ratio. Applicable: Aomori Prefecture

Shizuoka Prefecture is an example of a 'transit/supply infrastructure burden' prefecture: the Shizuoka section of the New Tomei Expressway has three lanes in each direction. In contrast, the Aichi section has only two lanes in each direction. This reflects Shizuoka Prefecture's greater role in supporting nationwide logistics and disaster response as a national trunk line. Construction costs for the expressway itself are covered by the national government and the expressway company, which limits the prefecture's direct fiscal burden. However, from a disaster-response perspective, input from Shizuoka Prefecture was incorporated during the design phase, resulting in the installation of facilities such as heliports. Therefore, it could be argued that Shizuoka Prefecture indirectly bears a burden through its surrounding infrastructure. Furthermore, statistical data from the Ministry of Health, Labour and Welfare (2024 Pharmaceutical Industry Production Dynamics Annual Report, published December 2025) indicates that Shizuoka Prefecture's production value for 'Pharmaceuticals + Medical Devices' in 2024 was 1.09 trillion yen (US$7.03 billion), ranking first nationally. However, despite this production being concentrated in Shizuoka Prefecture, the 'headquarters functions' — such as profits, decision-making, intellectual property, and finance — tend to be concentrated in Tokyo. Consequently, corporate taxes and high-value-added portions are less likely to accrue to Shizuoka Prefecture. Conversely, the 'peripheral costs' of industrial location, such as logistics, disaster prevention, and environmental measures, are typically borne by Shizuoka Prefecture.

The disparity in future burden ratios among prefectures likely reflects the accumulation of burdens resulting from the design of the national system and the division of roles between industry and infrastructure, rather than differences in municipal efforts. Note that the underlined funding source in the future burden ratio calculation formula comes from the national government. This applies 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. However, these factors are not included in the standard fiscal demand calculation formula. In other words, while the standard fiscal demand formula provides some adjustment, it is difficult to say that it adequately evaluates the structural impact of these factors. Although the standard fiscal demand formula is considered revisable, its basic structure was established in the 1960s. While partial revisions and additions to the adjustment coefficients have occurred since then, a substantial revision of the standard fiscal demand calculation criteria to align with current realities is desirable. From the perspective of the proactive fiscal policy currently under discussion within the government, revising the standard criteria for fiscal demand calculations is urgently necessary.

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.