Natural disasters and local government finance

We examine the quantitative impact of natural disasters, including earthquakes, on the cash flow as well as debt and other financial conditions of municipalities, using data from the Administrative Cash Flow Statements prepared by the Ministry of Finance to clarify the debt repayment capacity and cash flow status of local governments. We found that municipalities affected by natural disasters, except for the Great East Japan Earthquake, faced a temporary deterioration in net cash flow per capita, cash flow from administrative activities, and primary balance immediately after the occurrence of the disaster. The reason for the deterioration in net cash flow was that the cash flow from extraordinary administrative activities could not be compensated for by the cash flow from ordinary administrative activities and cash flow from financing activities. This was reflected in the increase in the balance of local bonds and the decrease in the balance of the public finance adjustment fund, which has been declining since the first year of the disaster. Although there is a national financial assistance program for disaster-affected municipalities, municipalities have been withdrawing from the public finance adjustment fund and using it to finance emergency and restoration activities. The cash flow from administrative activities began to improve six years after the disaster, but this was due to an increase in local allocation tax grants for the principal and interest repayment of local bonds issued for disaster recovery projects, rather than an increase in tax revenues due to reconstruction. In the municipalities affected by the Great East Japan Earthquake, net cash flow per capita increased after the disaster struck, and cash flow from administrative activities also continued to maintain an increasing trend almost consistently. This indicates that the cash flow situation is rather comfortable compared to those municipalities affected by natural disasters other than the Great East Japan Earthquake. The huge surplus generated by the cash flow from administrative activities is accumulated in special purpose funds and used as a source of funds for reconstruction-related projects to be implemented in subsequent fiscal years. This abundance of balances in the reserve funds greatly reduced the real debt, but as the reconstruction projects progress, the balances in the reserve funds are decreasing. At the current pace, the balance of the reserve funds is expected to drop to the same level as those of other municipalities affected by the Great East Japan Earthquake in the not-too-distant future.