The Hungarian Budget Review

1. The Hungarian Budget Review Daniel Bergvall and Ian Hawkesworth Budgeting and Public Expenditures Division

2. Introduction • Budget formulation • Parliamentary process • Budget execution

3. General government deficit forecasts

4. Budget preparation

5. Account Structure

6. Problematic institutionalfeatures • Focus on the actual deficit • Focus on the budget year • No clear rules of budgetary discipline

7. Focus on actual deficit • Determined by revenue (tax legislation) and expenditure (entitlements + discretionary). Actual deficit is constantly moving • Aiming at specific deficit requires continuing amendments in preparation and execution phases • Hampers orderly decision making process • Forces the government to take pro-cyclical decisions • Suggestion: Fiscal rule • Expenditure rule • Cyclically adjusted deficit rule (less transparent) • Entitlements – in or out

8. Focus on the budget year • The budget formulation process is focused on the budget year – lacks proper Multi-annual framework • EU convergence program is a de facto framework (flexible) but not implemented at line item level • Budget formulation needs to focus on the whole period in order to optimize results – especially saving plans • Ensure multi-year estimates are in line with the expenditure rule • Alternatives: hectic adjustments as cash limits, across the board cuts and accounting gimmicks

9. No clear rules of budgetary discipline • More top-down budgeting in Hungary– from totals, chapter to line item • The budget circular should contain the final ceilings • New spending must be contained within the multi-year ceilings • New initiatives in any area during the year need to be costed and fit under the ceilings • Clear rules of compensation requirement, but not a more inflexible system • New rules need explicit endorsement and publication of Hungarian government

10. Parliamentary process Submitted by September 30th General Debate – amendments (2000) Budget Committee Chapter aggregates decided Debate on appropriations below chapter level - amendments Budget Committee Final vote

11. Budget execution • Organisation of budget execution • Budget flexibility during budget execution • Service delivery

12. Organisation of budget execution • Treasury – financial implementation of the budget separated from Ministry of Finance in 1996 • Debt management agency – debt management • STA in Hungarian central bank set up in 1996

13. Flexibility during budget execution • Reallocation • Central reserve fund • Special reserves • Safety reserve • Saving of unspent appropriations

14. Service delivery • Organisation of the government sector • Central government - 50% of expenditure • Social security institutions - 25 % of expenditure • Extra Budgetary Funds - 3 % of expenditure • Local governments - 22 % of expenditure • Reduced number of extra-budgetary funds • Introduction of programme review under way • Separation of policy making and policy implementation

15. Accounting and Auditing Auditing • SAO independent institution reporting to the parliament • Broad mandate – all government expenditure can be audited, including local governments • Audit plan prepared by SAO • 3000 separate audits per year – 60-70 audit reports published • Prepares ex ante report on the Annual Budget Law • Audit Committee and specialised committees discuss the audit reports Accounting • Final accounts bill to parliament before end of August – voted on in November

16. Summing up • Fiscal slippage • Clear target – EMU accession • Optimism bias • Need for institutional strengthening to enhance budget discipline – fiscal framework and top-down budgeting • Relatively detailed input budget • Well functioning SAO