Fiscal Risks and the Quality of Fiscal Adjustment in Hungary

Abstract

Hungary's government has made great progress toward revealing the true fiscal cost of its budgetary and off-budget programs, containing the financial risks of its policies, and improving the management of public expenditures and contingent liabilities. Although far from complete, fiscal adjustment in Hungary has been successful not only in cutting the budget deficit but also in reducing less visible aspects of fiscal vulnerability.

The government of Hungary has contained the main fiscal risks of the transition to a market economy. It has paid off and resolved most problems in the banking and enterprise sectors.

Since 1995 it has implemented fiscal adjustment with the objective of long-term fiscal stability rather than an immediate deficit target. The main result has been pension reform, which has raised temporary deficits but reduced the long-term public liability. Only the health sector awaits the reform needed for long-term fiscal stability.

Levels of government spending, budget deficits, and public service remain high, but the government has made great progress toward rationalizing public spending and improving the management of budget and off-budget fiscal risks.

In the transition, the government has taken on new fiscal risks - mainly state guarantees and growing programs of credit and guarantee agencies (operating on behalf of government) organized after privatization to support, first, industries and, later, exporters. The government has dealt with these new programs of contingent government support prudently and transparently, with reasonable ceilings on (and reporting of) risks. Hungary is likely to face pressure for additional spending. Priorities in fiscal policy should include reforming health financing, establishing checks on hidden subsidies in guarantee programs, and determining the government`s optimal exposure to risk.

In terms of institutions, the government should aim to create a more flexible, responsive budget process and greater capacity to analyze medium-term fiscal risks, to build a more results-oriented budget management system, and to improve mechanisms for sharing risk between the public and private sectors under government programs.

This paper - a product of the Poverty Reduction and Economic Management Sector Unit, Europe and Central Asia Region - is part of a larger effort in the region to enhance the quality of fiscal adjustment in countries preparing for accession to the European Union. The authors may be contacted at [e-mail] or [e-mail].