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!