Comment Blog 20 March, 2024

Lessons from the 'Trinity Reforms'

India Woodward
Senior Events and Fundraising Officer

It is widely known now that many English local authorities are buckling under the weight of debt, demand, and depleted income. Nine ‘Section 114’ notices – effective declarations of bankruptcy – have been issued in the last four years, with many more authorities on the brink.

From the Levelling Up, Housing and Communities Select Committee, to councils, to major news outlets, it is accepted that the local government finance system is in urgent need of reform. So far, efforts have taken the form of single funding settlements for selected combined authorities and streamlining funding into larger pots, alongside targeted interventions and temporary bailouts in the local government funding settlement. Yet substantial financial reform and fiscal devolution have not yet played a significant role in England’s growing devolution programme.

Outside the UK, many countries have pursued changes that seek to address very similar challenges. In the early 2000s, Japan faced snowballing public debt levels (centrally and locally), overcentralisation, regional inequality, and poor local autonomy. Local government struggled to find the cash to provide the services they were responsible for. Japan’s prefectures and municipalities do important work, undertaking key administrative tasks and delivering public services such as schools, medical services, welfare and more.

In the early 2000s, Prime Minister Junichiro Koizumi's Cabinet launched the ‘Trinity Reforms’. This was a package of financial reforms that essentially reduced conditional grants from central government and expanded the local basket of revenue raising options – assigning taxes usually held in the centre and trusting local authorities to deal with local problems. The opportunities and challenges of this package offer lessons as England mulls its own spate of local finance reform.

Japan’s reforms were based on the idea that local government financial distress often stems from a council’s lack of autonomy over revenue raising. Local government in England would likely agree with this statement, with councils currently having little wiggle room with Council Tax. The Japanese reforms aimed to give local authorities the capacity to deal with issues they were best positioned to tackle, and leave the centre of government to deal with national issues – something we argued for in our recent paper ‘Devolve by default’.

Ultimately the results of the ‘Trinity Reforms’ were mixed. On one hand, it established a path to improving the soundness of local financial administration and gave local government a broader tax base to fund its public services. It led to 3 trillion yen transfer of taxes from national to local government.

On the other, the attempt to balance fiscal devolution against a guaranteed minimum local income led to accusations that no real incentives were created for local government to raise their own taxes. For some places, cuts in the central government funding exceeded the additional income gained from the new tax sources causing them to face more financial insecurity than before.

The shortfalls of Japan’s reforms highlight a key lesson: fiscal devolution is not a panacea and cannot be expected to improve things in isolation. Instead, greater fiscal autonomy must sit within a programme of comprehensive system-wide reform. Only this can ensure that local government is empowered and equipped to take advantage of their powers, and incentivised to drive their own growth.