Ideas for Developing Asia and the Pacific

A Comparative Analysis of Central Local Government Relations

Video | 10 May 2016

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Naoyuki Yoshino, Dean of the Asian Development Bank Institute, talks about the relationship between central and local governments in Japan and the PRC, with regard to tax revenues.

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A Comparative Analysis of Central Local Government Relations

Description: Naoyuki Yoshino, Dean of the Asian Development Bank Institute, talks about the relationship between central and local governments in Japan and the PRC, with regard to tax revenues.

Central government and local government relations are very important. In some countries both central and local governments can levy tax. I would like to talk about the Japanese case. About 40% of tax revenues are collected by local governments and 60% of the tax is collected by the central government. However spending is the reverse of this. 60% of spending is carried out by local governments and 40% by the central government. So this 20% difference needs to be transferred from the central to local governments.

There are many different levels of local government. Large cities such as Tokyo generate huge tax revenues but rural regions do not generate so much tax revenue. Comparable development of different regions within a country is required so a transfer of funds from central to local governments will be needed. In principal the amount transferred should be based on population and the size of each rural region.

The PRC is also developing central local government relations in a positive way. Local governments depend a lot on real estate transactions. When the economy is in decline local governments need to maintain their tax revenues. Therefore local governments have depended on multiple real estate transactions, creating a bubble in the property market. A certain amount of corporate tax and income tax revenue needs to be generated by local governments and a transfer of revenue from central to local governments will also be necessary.

Lastly I want to look at the local government bond market. If local government bonds are issued without control, like in Brazil and other countries, local governments may become bankrupt. Strict control over the issuing of local government bonds is required based on income from tax revenues, and in future whether local government can return the bonds they issue. So central local government relations are very important in many Asian countries.

An example of a study of central local government relations is a working paper published by ADBI and written by Mr. Morimoto, providing Japanese case studies of central local government relations. Thank you very much

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