Recent Developments in Hungarian Institutional Fiscal Frameworks

Richard ADORJAN

Head of Department

Budgetary Department

8th Annual Meeting of OECD-CEESEE SBO, Tallinn, 28-29 June 2012

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MOTIVATION

Why fiscal framework should be reinforced in Hungary?

• High public debt: highest among V4

• Deficit jumps at election years

• Volatility of the output gap

• Weak confidence in economic policy

• Pressure from the EU and international practice

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Used to have high deficits in election years

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FISCAL FRAMEWORK 2012 -

Significant changes from January 2012: • Constitutional debt brake rule

• Veto power to the Fiscal Council

Legislative basis

Fundamental law •debt brake

•status of the Fiscal Council

Law on the economic stability

•details

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FISCAL FRAMEWORK 2012 -

Debt break rule in the Fundamental Law:

• Debt limit: 50% of GDP

• Debt/GDP ratio should decline until it reaches the constitutional debt limit

• Escape clause:

– special legal order

– significant and protracted recession

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Details of the debt break rule:

• ∆nominal gross debt = (inflation - real GDP/2)

• It ensures the continuous reduction of the public debt-to-GDP ratio in the event of positive economic growth

• Anti-cyclical

• Simple

• Escape clause = negative GDP growth

FISCAL FRAMEWORK 2012 -

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Details of the debt break rule:

Coverage: – Central government

– Local government

– Other bodies classified into government sector

= more or less equal to the Maastricht definition (special items, consolidation between sub- sectors, accounting techniques)

FISCAL FRAMEWORK 2012 -

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Sub-level debt rules:

• Government consent is needed if

– local government or

– other bodies classified into government

apply for credit.

• Detailed consent procedure in case of local government credits

• No consent is needed: – Credit for small amount

– Pre-financing of EU project

FISCAL FRAMEWORK 2012 -

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Control on the debt break:

• Government mid-year review

• Modifies the budget in case budgetary development are not in line with the debt break rule

• It analyses only budgetary impacts over which the government has control = net of stock flow adjustment

• Examination excludes: – Impact of the exchange rate on debt

– Capital transfer in bank rescue operations

FISCAL FRAMEWORK 2012 -

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FISCAL FRAMEWORK 2012 -

FISCAL COUNCIL

• Members of the FC: – president of the FC (appointed by the President of the Republic for six

years)

– the governor of the central bank

– the president of the State Audit Office

• FC uses the analytical capacity of the central bank and the State Audit Office

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FISCAL FRAMEWORK 2012 -

FISCAL COUNCIL

Tasks: Explicitly less tasks than before but veto right

• The FC forms an opinion on the draft budget proposal

• Veto right: The adoption or modification of the Budget is subject to the prior consent of the FC

• Veto right links only to the constitutional debt rule

• FC gives consent to the budget proposal if it ensures the decline of the debt ratio

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SUMMARY

• Hungary reformed its fiscal framework in 2012:

– Debt break

– Binding debt rule

– Fiscal Council with veto power

• 85/2011 Directive is not transposed yet. Need to be done over the next one and half year.

• Transposition will be challenging (exp. numerical fiscal rule)

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Thank you for your attention!