Fiscal governance in Hungary

CímFiscal governance in Hungary
Közlemény típusaFolyóirat cikk / Journal Article
Év / Year2012
SzerzőkJankovics, László
Újság / JournalFiscal frameworks across Member States: Commission services country fiches from the 2011 EPC peer review. Occasional Papers
Kötet / Volume91
Kezdő oldal / Start Page20
Oldalszám / Pagination20-26

Until late 2008, the Hungarian budgetary framework was characterised by a number of important weaknesses, which recurrently exposed the country to a full-blown electoral cycle in public finances — government deficits had reached their highest levels in election years (1994, 1998, 2002 and 2006). This was corroborated in various empirical studies that found that Hungary had one of the weakest budgetary frameworks in the EU (6 ). Following the adoption of the Public Finance Act in 1992, no major changes had essentially been made to the way in which the annual Hungarian budget was planned, formulated and implemented until the recent crisis. The only numerical rule at the time (a cap on local government indebtedness) could not prevent a rapid accumulation of debt by municipalities. As the only fiscal institution existing during this period, the State Audit Office’s work primarily focused on the ex post financial audit of public accounts and legal compliance with the existing provisions. In order to strengthen budgetary discipline and transparency, a new fiscal framework was adopted by the parliament in November 2008 in the context of the government’s reform programme (endorsed by the EU-IMF medium-term loan of EUR 20 billion granted in reaction to the financial crisis) (7 ). The reform encompassed the enactment of the new Fiscal Responsibility Law (FRL) in conjunction with a number of amendments of the existing organic law (Public Finance Act). As regards medium-term budgetary planning, the FRL stipulates that the increase in the central government’s gross debt may not increase the inflation rate and the primary balance targets must be consistent with the former objective (real debt rule). These rules were backed, in particular, by stringent procedural rules and institution building: stricter regulation for supplementary budgets and a review of accounting practices, the introduction of the mandatory offsetting principle (pay-go rule) as well as the establishment of an independent three-person fiscal council (FC) equipped with its own 30-strong analytical staff to provide independent macro-fiscal forecasts and fiscal impact assessments. Following an initial three-year phase-in period (for which a couple of additional temporary rules were also enacted), the new set-up was expected to be fully effective by the time of the 2012 budget preparation