The internal affairs ministry has introduced four indicators to gauge the financial health of local governments based on a law enacted in June to prevent bankruptcy of local governments. In view of financial problems at local governments, like the bankruptcy of the city of Yubari in Hokkaido, the new system is inevitable. Prefectural and municipal governments should realize that fiscal laxity will eventually hit the lives of residents hard through deterioration of public services.

The indicators will show the ratio of deficit to standard revenues, the deficit on a consolidated basis (including the financial conditions of third-sector entities and publicly run enterprises), the ratio of debt amounts to be repaid in the year to revenues, and the ratio of the total amount of outstanding debts to revenues on a consolidated basis.

If any of the four indicators fails to achieve the standard set by the ministry, the local government concerned must accept external auditing and work out a plan to restore health to its finance. Fifty to 100 local governments are expected to fall into this category if the formula is applied to fiscal 2006 figures.

If three indicators, excluding the ratio of the total amount of outstanding debts, further deteriorate, the local government will be subjected to the state¡¯s strict supervision, which will include setting a limit on the amount of bonds that can be issued.

Both the prefectural and municipal governments must make public their financial conditions measured by the indicators starting with the settlement of accounts for fiscal 2008, which will be in the autumn of 2009. They cannot hide deficits, as Yubari did, from the eyes of residents. Local assembly members must realize that their responsibility to watch their local governments¡¯ financial health will become much greater.

While financial discipline is important, the ministry must pay attention to the fact that some local governments have to continue to deliver indispensable services even with a deficit, such as running a hospital. The central government must be flexible enough to extend financial assistance when necessary.