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Copyright © Takero Doi. 172005/9/14
Ex. Expense of facilities for compulsory education
50 30 15 5
0 10 20 30 40 50 60 70 80 90 100
%
Nat'l Gov't Disbursement
Local bonds & debt service expenditure covered by LAT grants
Local bonds without coverage of LAT grants
General Revenue
Copyright © Takero Doi. 192005/9/14
Public Works in Local Net Total
0
5
10
15
20
25
30
35
40
45
50
1962 1967 1972 1977 1982 1987 1992 1997 (Fiscal Year)
(trillion yen)
0
5
10
15
20
25
30
35
40
45
50(%)General Revenue
Nat'l Gov't DisbersementLocal BondAppropriation percentage of local bonds
Copyright © Takero Doi. 202005/9/14
Net Burden of Prefectural Bonds on the taxpayer of Kyoto prefecture
Total outstanding of prefectural bonds (1,218.7 billion yen) 636.1 Coverage by LAT grant
Outstanding per residents of a prefecture: 227 thousand yen(Outstanding of the national debts per capita: 3,530 thousand yen) 582.6Total
Explanationamount
Source) Kyoto Prefecture
Kyoto Prefectural government recognizes that prefectural bonds covered by (future) LAT grants are not its own debts (or excluded from "true" total debts)!
Copyright © Takero Doi. 212005/9/14
Very Simple Model for Comparative Institutional Analysis on Local Bonds
J local governmentsImplement public investment with issuing local bondsThe existence of the possibility of default of local governments if the central government does not relieve the local government
Copyright © Takero Doi. 222005/9/14
Characteristics of the US system
Non-involvement of the federal government in the debt obligations of the local governmentsThe existence of the possibility of default of local governmentsRating agencies effectively play a role by reflecting the disparity in credibility existing between local governmentsDiffering ratings are assigned to local governments reflecting their credibility
Copyright © Takero Doi. 242005/9/14
Two EquilibriaAn equilibrium in the US systemA separating equilibrium with rating agencyAn equilibrium in the Japanese systemA pooling equilibrium with LAT grantsUnder some conditions, social welfare in the US system is better than one in the Japanese system.
Copyright © Takero Doi. 262005/9/14
Market-oriented Local Bond SystemMinimizing burden Maximizing profitsMinimizing burden Maximizing profits
Local Gov'tsLocal Gov'ts BanksBanks
"Implied gov't guarantee"
The risk is shared among the participants in the financial market
The risk is shared among the participants in the financial market
Financial Market
Accept interest differences arising from the fiscal situations among municipalities with varying financial capacities.
Borrowingand
repayment
Copyright © Takero Doi. 272005/9/14
Implications for reform of the Japanese local bond system
The origin of local fiscal discipline under decentralization is the existence of interest rate differences by market mechanismsA rigorous study of the repayment capacity of various actors in the market creates fiscal disciplineThe existence of various rules that support market mechanisms
Copyright © Takero Doi. 282005/9/14
Implications for reform of the Japanese local bond system (cont'd)
Autonomous fiscal administration based on a mid-term capital commitment planEstablishing rules for debt liquidation through bankruptcy lawsAn adequate burdening of risk concerned with local bonds via market
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