Impact of COVID-19 on Local Public Finance―Did Every Individual Local Government’s Balance of General Account Worsen in the COVID-19 Pandemic?

Abstract

　While COVID-19 measures had not been incorporated at all into the Local Finance Plan decided by the central government nor the Local Allocation Tax for individual local governments for FY2020, intergovernmental transfers were allocated to local governments through three supplementary budgets drawn up by the central government, and a sum amounting to 20.8 trillion yen in additional national treasury disbursements was granted toward local policy measures for the response to COVID-19 measures. The majority of that was used to cope with an increase in expenditures, including special lump-sum benefits of 100,000 yen per inhabitant paid by municipalities and fully subsidized by the central government. The expansion of “Financing System Loans” for individuals and small- and medium-sized enterprises also increased revenues and expenditures of the general accounts; the total revenue for all local governments increased by more than 26.8 trillion yen year-on-year and total expenditure increased by more than 25.7 trillion yen year-on-year, resulting in a slight improvement in the General Account balance.

　Much of the additional National Treasury Disbursements could be described as being neutral against the revenue and expenditure, but it is possible for the aggregated balance to either improve or worsen depending on how the “COVID-19 Temporary Grant for Regional Revitalization” was used and the operation was implemented toward local fiscal policy, which functioned as both categorical matching and non-matching grants. Accordingly, by grouping prefectures, municipalities that received the Local Allocation Taxes and those that did not, based on their population size, then analyzing the FY2020 settlement accounts of individual local governments, we found that the “Modified Real Single Fiscal Year Balance”, an indicator modified from the published “Real Single Fiscal Year Balance”, measuring substantial changes both in a cash balance of General Account and the Fiscal Stability Funds, had improved for more than 80% of the prefectures and about two-thirds of the municipalities. However, when this indicator is broken down into a “Single Fiscal Year Balance”, as an indicator of substantial changes in cash balance, and “Net Increase in the Fiscal Stability Funds”, we found that the breakdown of the indicator was not uniform— 40% of the local governments saw improvements in both aspects, 20% saw only in the “Single Fiscal Year Balance” surplus, 30% saw only in the Net Increase in the Fiscal Stability Funds, and 10% saw both worsen. The impact of the COVID-19 pandemic has lingered on in both FY2021 and FY2022, and there is a need to continue conducting such analyses.