What England can learn from Japan's approach to local government finance

Local government in Japan shares many issues with its cousins in England. Sluggish economies, geopolitical uncertainty and volatility, demographic and social shifts – especially ageing, rising demand for local public services – particularly for care and specialist education – technological disruption, and socially and spatially uneven transition amid climate change. Many of these concerns have generated acute local funding challenges and financial pressures.There are important differences between the two countries too, from which England has much to learn in addressing its particular problems and adapting its existing system. Sharing ideas prompts fresh thinking and the potential for innovative and novel solutions.Each country has experienced dramatic increases in what are termed compulsory expenditures in Japan and statutory services in England. Overall expenditures are rising alongside their share of total budgets.The architecture of the local government funding system is critical for Japan and England. Despite recent incremental tweaks, governance and funding remains highly centralised in England. The legacies of austerity and increased local financial self-sufficiency remain. The UK Treasury is still keen for local government to raise more of their own funds and be less dependent upon national government transfers, albeit in ways that are relatively low risk and do not require exceptional forms of support when things go wrong. However, local government in England lacks the autonomy and powers to travel far in this direction.Looking at Japan, national government emphasises greater local autonomy and fiscal discipline, encouraging municipalities to broaden their own revenue base and manage expenditure more efficiently. But this approach does not translate into an expectation that local governments should fully ‘stand on their own'. Instead, a strong redistributive system, centred on the Local Allocation Tax, addresses local fiscal inequalities and imbalances, and underpins fiscal stability and national minimum service standards.Basically, the Local Allocation Tax is calculated as the gap between the estimated cost of providing standard public services and the municipality's own tax revenue. This gap is then filled by national government transfers.Each country has experienced dramatic increases in what are termed compulsory expenditures in Japan and statutory services in England. Overall expenditures are rising alongside their share of total budgets.Adult social care is undergoing substantial change in demand from an ageing society and provision costs are rising following staff wage increases in a traditionally poorly paid sector reliant upon people skills. Financial pressures are building in both countries.Debate over system reorganisation is ongoing, focused on the amount of funding in the system and the levels at which funding is raised and services delivered. In England, discussion has centred on the creation of a National Care Service funded through national taxation and delivered locally. In Japan, the Long-Term Care Insurance system is funded equally by insurance premiums from those aged 40 and over and public funds, the latter shared between national (25%), prefectural (12.5%) and municipal (12.5%) governments, with municipalities responsible for service delivery.Budgets are longer-term and more integrated in Japan. Many local governments adopt public finance plans of around 10 years, though they vary by area. England has only recently moved to a three-year settlement from annual single-year arrangements.Best and worst-case estimates of budgets are incorporated in the planning cycles in Japan, building in a degree of preparedness to cope with disruption and shocks. Local government in England prepares draft budgets, including service demands and funding estimates, then has to wait for and respond to the provisional settlement from national government before producing a final budget and local residential property (council) tax level for council approval.In Japan, overall budget ceilings are typically set each year, with departments required to prepare draft budgets under savings targets, sometimes involving reductions of around 10% from the previous year. Rather than England-style austerity, this mechanism aims to reduce or eliminate lower priority programmes to create fiscal space to reallocate funding to new budget proposals from departments. Balanced budgets are a philosophy in Japan, rather than the legal requirement they are in England every year.System-wide local public finance is monitored in Japan to enable detection of problems through indicators of local fiscal health, including deficits in core and consolidated accounts, debt repayment burdens and future liability exposure. Where necessary, there is scope for pre-emptive action by national government, including a yellow and red card system. Demonstrating the effectiveness of this approach, these warnings are little used.What England Can Learn from Japan's Approach to Local Government FinanceSuch an approach and experience offer much for the Ministry of Housing, Communities and Local Government and the new Local Audit Office in England to consider in addressing financial pressure, distress and systemic concerns.High levels of centralisation in England have given rise to calls for greater fiscal devolution to expand the array of local revenue raising tools and broaden the local tax base. Recent moves on visitor levies are a step in this direction. Similar tourism taxes in Japan are classified as non-statutory local taxes and fall outside the Local Allocation Tax calculation. As a result, any revenue generated from these taxes can be retained entirely by the municipality, providing a clear fiscal incentive for their introduction.The lesson is clear: how such local taxes are articulated within the existing funding system and between levels of government is critical.One of the most innovative mechanisms designed to address local fiscal disparities in Japan is the Hometown Tax (Furusato Nozei). This scheme allows taxpayers to voluntarily redirect a portion of their income tax payments to municipalities of their choice, including places where they do not reside. In return, donors often receive local speciality products, such as regional food or crafts, as a form of appreciation. The system has become extremely popular in Japan and has generated significant additional revenue for many rural municipalities.It can be understood as a hybrid mechanism, combining inter-regional fiscal redistribution, voluntary taxation and regional marketing. Such novel ideas are of interest in England and at least suggest the potential for innovations even within the currently highly centralised system.None of these ideas can simply be imported from one national setting to another. But they do suggest possibilities for doing things differently, prompt discussion about how such ideas could be adapted, and open up space to think about how the existing local government funding systems in Japan and England can be improved for the future benefit of people and places.Naoki Fujiwara is vice dean, professor at the faculty of regional development studies at Otemon Gakuin University, Osaka. Andy Pike is the Henry Daysh professor of regional development studies in the Centre for Urban and Regional Development Studies (CURDS) and Insights North East at Newcastle University

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FINANCE

What England can learn from Japan's approach to local government finance

By Andy Pike, Naoki Fujiwara | 04 June 2026

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