Pay Cuts for Local Government Employees

3/4/2013

 Deputy Prime Minister and Finance Minister Taro Aso agreed with Minister of Internal Affairs and Communications Yoshitaka Shindo on January 27 to urge local governments to cut the pay for their employees in July instead of initially planned April as part of the central government’s local finance reforms under its fiscal 2013 budget. The Cabinet of Prime Minister Shinzo Abe approved the agreement and conveyed the decision to local governments on January 29. Based on the decision, the central government will reduce its tax allocations to local governments in the year by 390 billion yen to 17.1 trillion yen, the first cut in six years.

 

 The Ministry of Finance had earlier asked the local governments to reduce the salaries for their employees in April by 7.8%, the same cut already applied to national public employees in fiscal 2012-2013. In order to have the pay cut accepted by the local governments, the Ministry of Finance had been in consultation with the Ministry of Internal Affairs and Communications on specifics such as delaying the timing of the reduction. The proposed delay will trim the pay cut for local government employees to 5.9% because their pay will remain intact in the first three months (April-June) of fiscal 2013. However, the local governments strongly reacted to the Cabinet decision, saying it could threaten their autonomy.


 The pay cut for public employees was based on the policy of the previous Democratic government on redistribution of financial resources aimed to set aside more cash to finance the reconstruction of the areas devastated by the Great East Japan Earthquake. The government of Prime Minister Yoshihiko Noda enforced the pay reduction for national public employees, hoping that the local governments would follow suit. Abe’s Liberal Democratic Party (LDP), which defeated Noda’s Democratic Party of Japan (DPJ) in the December general election, acted swiftly apparently to impress the nation that it has greater ability than DPJ to get things done.

 

 Local governments are empowered by law to determine the pay scale for their employees in accordance with their own ordinances. That is why they oppose the Cabinet decision. Their common criticism is that it is illogical and unacceptable for the national government to press a pay reduction on local governments. On the other hand, the Abe administration looks determined to enforce its decision wherever pay levels for local public employees are higher than those for national public employees.


 A comparison of their pay levels is normally based on the Laspeyres index. Assuming that the pay scale for national government employees is 100, that for local government employees will be lowered when it is found to be higher than 100. However, it is doubtful if the application of this mechanism automatically leads to the 5.9% reduction proposed by the government.

 

 Another problem here is those local autonomous bodies which do not receive national tax allocations, such as the Tokyo metropolitan government. Such organizations would be hardly affected by the planned allocation tax reduction. The Abe administration said it will cut the allocation of special-purpose tax revenues which Tokyo uses to finance pays for teachers. However, Tokyo Governor Naoki Inose said there will be no pay reduction for teachers even in that case. He has vowed not to accept the government request for pay cuts for local public employees.

 

 Some critics say that public employees who work hard to help people in the disaster-hit areas will not understand why they are forced to bear extra burden in the form of pay reduction to secure funds for reconstruction projects. Others say that public employees who are treated better will have to tolerate a pay cut in consideration of the plight of the people in the affected areas. Some people argue in favor of a national referendum on the proposed pay reduction. But it looks impractical to override the Cabinet decision.


 In the private sector, there are a number of companies that fix the wages for their employees, based on the pay scale for government employees. It is unclear whether the government had taken this relationship into full consideration when it took its decision. The government decision amounts to a fiscal policy to squeeze out a part of reconstruction funds at the sacrifice of public employees. The general public may find it easier to understand. However, it remains to be seen if the government can carry out the 7.8% pay cut as planned and promote post-disaster reconstruction and fiscal consolidation without giving any adverse impact on the private sector.

 

 

Written by: Yuta Tate