The 0.42 Fiscal Strength Index
Kitano Prefecture (population 1.1 million) has a fiscal strength index of 0.42, down from 0.51 in 2010. Tax revenue is ¥180 billion; local allocation tax is ¥90 billion; debt service is 19% of general revenue; social welfare is 38% of the budget and rising 3% a year. Population is falling 1.2% a year, with 31% aged 65+. The governor proposes four measures: (A) cut public works by 30%, saving ¥18 billion; (B) raise bus fares by 20%, saving ¥2 billion but reducing ridership by 8%; (C) merge three hospitals into one, saving ¥6 billion but increasing average travel time by 25 minutes; (D) offer a ¥20 billion subsidy to attract a semiconductor plant projected to create 1,500 jobs. The prefectural assembly must choose a package. A citizens' group argues that the subsidy is 'free money' because the plant will pay taxes.
1. Evaluate the claim that the semiconductor subsidy is 'free money.' Use the concepts of opportunity cost, fiscal multiplier, and tax incidence.
Read the worked answer
It is not free. The ¥20bn is an immediate cost; the plant's taxes arrive later and may be partly captured by national corporate tax and by abatements. Opportunity cost: ¥20bn is more than the hospital merger saves (¥6bn) or the bus saving (¥2bn). Fiscal multiplier: construction and wages may create local demand, but if the plant imports components and workers, leakage reduces it. Tax incidence: the prefecture may bear infrastructure and school costs while the plant captures agglomeration benefits. The claim would need a break-even calculation: annual local tax revenue plus increased resident tax, minus services and abatements, over the plant's life.
2. Rank the four measures by their likely effect on the prefecture's fiscal sustainability and on equity. Explain a trade-off.
Read the worked answer
Fiscal sustainability: A is largest and quickest (¥18bn), C is medium (¥6bn) but recurrent, B is small and may reduce fare revenue further, D is negative upfront. Equity: B and C hurt carless elderly and rural patients; A may hurt construction workers and small contractors; D may favor a new workforce over existing low-wage care workers. A defensible package pairs A with C only if transport is provided, and treats D as a loan or performance-contingent grant, not a grant. Trade-off: cutting public works improves the debt ratio but may deepen depopulation by removing local employment.
3. What three fiscal or social indicators would you monitor over five years to judge whether the package worked, and why?
Read the worked answer
Indicators: (1) debt service ratio-does it fall below 15% without new borrowing; (2) fiscal strength index-does it stabilize above 0.45; (3) net migration of 20–39-year-olds and hospital travel time for patients over 75. These connect fiscal outcome to demographic and equity effects; a package that improves the ratio by driving away young families is not sustainable.