Naoto Kan Takes Hit on Roads; Sheds Light on Local/National Government Tug-of-War

Nato Kan has a quicksilver intelligence and an economic yet nagging delivery that makes him one of the most effective snipers on the TV screen. But where I really admire him is that he can take hits as well. He is rarely if ever flustered, which enables him to play away games without fear.

That’s a good thing, because Mr. Kan is sometimes literally playing away, as he has spent much of his time this month talking about the gasoline tax surcharge and road expenditures to local government leaders and their constituents. Local government heads, of course, mostly favor an extension, and he is getting an earful over the DPJ demands that the surcharge be abolished.

But many of them are also telling him something else. They want to see the money put into the general budget revenues, just as the DPJ insists (and as it had already implied in its policy manifest*). This is partly a reflection of public perception that much of the road money is being wasted. But it also strikes at the core issue of the tug-of-war between the national and local governments, namely, fiscal freedom.

Prime Minister Koizumi’s “Trinity” Reform of local government financing; i.e. elimination and reduction of national-to-local government subsidies, transfer of tax revenue sources, and review of the general revenue transfers; had left many prefectures and municipalities deeply unsatisfied. For one thing, local governments, already under severe fiscal stress, were being asked to join the national government in taking a haircut. But just as distressing to them was the fact that the subsidy-tax revenue source tradeoff did not represent a clean break from national prioritization and control. The subsidies － usually provided as a determinate fraction, usually 1/4 to 3/4, of the targeted expenditure － were mainly reduced, not eliminated altogether, enabling the national government to maintain control.

There were other issues, such as the fact that the reform it tended to shift distribution in favor of better-off areas, dividing the regions themselves. But redressing the haircut and reducing central command and control continue as the two key issues that unite the local governments in opposition to the national government. So this is the background against which the governors and mayors are pressing their claims against those who will listen, including Mr. Kan and his DPJ colleagues.

The DPJ had already in a sense tried to address their concerns with its promise that the national government would take the entire 2.6 trillion/yr hit. But they do not trust the DPJ to be able to package the elimination of the surcharge with painless revenue transfer (nor do they believe that the national roads don’t matter to their well-being). They realize that, other things being the same, their best chance to maintain their share of funds while also keeping those national roads coming lies in maintain the surcharge. However, they would also like to have more discretion in using those funds. One way to do that would be to give the local government its share of what is now the road money, which is what putting the money into general budget would make possible.

Personally, I do not think that putting money into the hands of local government necessarily decreases the chances for waste and corruption. However, the national government has not been doing a good job of exercising self-restraint on this front, notwithstanding the claims Naoki Inosé makes on behalf of the Koizumi road reform. At a minimum, it will be a useful exercise in political accountability to put the matter into the hands of local governments. It would also be politically expedient for a party whose financial well-being and political machine are not yet inextricably intertwined with the special interests to champion their cause. It should not be difficult to formulate a proposal that goes a great way in accommodating their demands either. The only political snag is the DPJ’s insistence that the surcharge be dropped, at least immediately, something that was never in its policy manifest in the first place.

The DPJ actually seems to be heading, perhaps unintentionally, in that direction. In the last few weeks, they have been moving away from the “cheap gasoline” narrative and towards the “waste and corruption” attack mode. It is but a short leap from there to “power to the prefectures and municipalities”.

Any set of changes will require an extensive review of the practical consequences (including, of course, smoothing out the effects of any reductions between (relative) winners and losers), as well as the legislative and bureaucratic measures that need to implement them. Moreover, the LDP must be brought into a discussion along these lines in time to make the switch. So, it is likely that little more than broad outlines can be worked out before the March 31 deadline for a deal.

This is perfectly compatible, of course, with a mid-term extension while the deal is worked out in detail. In fact, it almost demands it. It’s also good political tactics, since taking the initiative and shifting in this direction would take away the most important constituency that the LDP has on the surcharge and road expenditures.

In real life, things almost never work out the way these scenarios play out in your head. But is there anything else out there that would be good point from where the two House Chairmen can work their conciliation magic?

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More generally, the DPJ should also recognize the broader tug-of-war and use it as an integral part of the strategic background to its fight to topple the ruling coalition. A political platform firmly grounded on the needs and wants of the locals will minimize shifts in party policy as the result of leadership turnover, and will also yield benefits in the trench battles. The locals matter. In this respect, the national, bipartisan, political wing of the Sentaku movement, scheduled to make its official debut on February 20 bears watching. I hope to work “the locals” angle when I have a better handle on the issue.

* I addressed this point here, among other places.