THE ROLE AND THE RECENT TRENDS OF FISCAL RULES IN HUNGARY

Dr. Gbor Bende-Szab CSc. associate professor, head of MA school for European and International Administration, Dek Ferenc Faculty of Law and Political Scienses, Szchenyi Istvn University, Gyr, Hungary; CONTACTS - e-mail: bszguniv@upcmail.hu - website: bszg.net

Abstract: This paper presents all the needs and aims what has resulted in the creation of the so-called Fiscal Responsibility Framework, and its legal side the fiscal rules. During the last two decades the fiscal rules whether operational or institutional ones - conquerred several countries in every continent, and in 2008 they arrived at Hungary, too. After some more or less vague years in 2011 owing two an overall new approachment on the governmental side and, as a consequence, a bunch of new parliamentary acts on public finances the Hungarian fiscal rules gained a stronger and more coherent structure, as it is presented here.

Keywords: public finance in crisis, fiscal alcoholism, fiscal responsibility, fiscal responsibility acts, fiscal operational rules, budgetary deficit limitation, state debt brake, limits on public borrowing, fiscal council, state debt management

Introduction During the first decade of the 21st century (especially after the 2008 finacial crisis) the issues of fiscal discipline have gotten a renewed impetus throughout the modern world (especially in Europe). Besides the day-to-day financial management instruments and other budgetary practices this impetus meant an ever-growing need for a bunch of fiscal rules in the activity of national legislatures. As a consequence fiscal rules have gained considerable prominence over the last years in the countries of the Euro area as well as in some CEE countries, where both politicians and voters are concerned about large and persistent budgetary deficits and public debts, these rules are typically seen as a way to enhance public financial sustainability. The needs for the new-type fiscal regulation based first and foremost on the following social and financial factors: the growing gap between the traditional welfare state role (i.e. the national budgets expenditure side) and the available financial resources (i.e. the national budgets revenue side);

 the deficiencies of governmental responsipility, the so-called fiscal alcoholism1 which results very different behaviours of policymakers during economic booms and busts, such as irresponsible (almost euphorical) spending in expansions and extreme restrictions in recessions; based on both phenomena mentioned above most of the European Union countries suffer from the high budgetary deficits (higher than 3 percentage of GDP2) and severe state debts (higher than 60 percentage of GDP 3), several countries (e.g. Greece, Italy, Portugal, Spain) have data differs excessively from these reference values (especially concerning the debt factor); in addition to the budgetary deficit and state debt anomalies the 2008 worldwide financial crisis have worsened the situation further. In practice the new-type fiscal rules can emerge on both constitutional and statutory levels (depending on the legislatures will), however, the goals are the same in both cases, as follows: forcing the political elite, the policymakers (the MPs as well as the government) to a higher level of financial discipline; achieving a balanced budget; achieving a sustainable budget; achieving a transparent budget; in the medium term reducing the public debt, achieving a prudent level of that; in EU (especially EA) member states: fulfilling the so-called Maastricht fiscal convergency criteria4. An overall and hopefully successful answer to the different problems outlined above has been the so-called Fiscal Responsibility Framework (FRF) in Europe as well as in other parts of the world.

Fiscal Responsibility Framework (FRF) A fiscal responsibility framework was firstly created in New Zealand which country at the period of 1990s had suffered from very similar (but less severe) financial problems than most of the European countries nowadays. In 1994 as a legal answer the Auckland Parliament enacted a new type of law christened as Fiscal Responsibility Act (FRA or FRL as fiscal responsibility law). Owing to the fact that this very first FRA proved to be a successful one as the public finances of New Zealand improved over the next decade in a significant way. As a consequence of this success onwards from the 2000s more and more countries started to
1 2

A terminus technicus coined by George Kopits in a Wall Street Journal article. As the reference value for the maximum percentage of budgetary deficit determined by the 12th Protocol (on the excessive deficit procedure) to the Treaty of the Functioning of European Union, Article 1. 3 As the reference value for the maximum percentage of state debt determined by the 12th Protocol (on the excessive deficit procedure) to the Treaty of the Functioning of European Union, Article 1. 4 See footnotes 2 and 3.

follow New Zealands example preparing and enacting their own financial responsibility laws. The countries having such laws covers all continents from Ecuador, Peru or Brazil through Ghana, Nigeria, Pakistan or India to a lot of European countries, such as Spain or the United Kingdom). The different sorts of fiscal rules incorporated into the national Fiscal Responsibility Framework can be defined as borrowing a widely accepted definition - a permanent constraint on fiscal policy, typically defined in terms of an indicator of overall fiscal performance5; that is a fiscal rule must be a permanent constraint stretching out the foreseeable future and binding all the policymakers (both in the Parliament and the Government) as well as a concrete indicator of fiscal performance based and expressed in verifiable terms. According to the authors of this definition the different fiscal rules can be classified into three main groups, such as 1) balanced-budget or deficit rules, 2) borrowing rules, and 3) debt or reserve rules.6 Generally speaking, a national Fiscal Responsibility Framework - from a legal point of view - can be built on two main legs: an operational leg consisting of more or less operational fiscal rules (as mentioned in the above section) concerning budgetary deficit, budgetary limitations, special budgetary procedures, etc. on one hand; and an institutional leg establishing one or two (maybe more) special organs, such as fiscal councils or debt management committees on the other. For example the New Zealander FRA outlines the limitations of public debt in order to reduce it to a prudent level (e.g. the introduction of a three-year fiscal plan targeting for a consolidated budget balance and public debt, defines the principles of the responsible financial management (e.g. the annual operating revenues must be higher than the annual operating expenses, or providing a buffer against factors that may impact adversely the public debt level), and determines some reporting requirements (e.g. introduces a Fiscal Strategy Report published by the Government annually, or sets the fundamentals for preparing a Generally Accepted Accounting Practice). As far as the institutional side is concerned the New Zealander law operates an Accounting Standards Review Board as well as a National Debt Management Committee. However, the experiences of the follower countries fiscal responsibility laws shows a mixed picture, mainly because of the different variants applied (or not applied) by the different countries varies in a relevant way. Among the different variants which can influence or explain the success or the failure of a countrys FRA one should mention especially the following factors: the laws coverage and jurisdiction, i.e. FRF should be applied to only central government or it involves the subnational governmental levels, too; naturally the larger coverage proves to be more rational and efficient;
5

George Kopits and Steven Symansky: Fiscal Policy Rules, Occasional Paper 162, International Monetary Fund, Washington DC, 1998, p.9 6 George Kopits and Steven Symansky: Fiscal Policy Rules, Occasional Paper 162, International Monetary Fund, Washington DC, 1998, Box 1 and Appendix 1.

 the possibility or the lack of institutional or personal sanctions in case of breaching fiscal provisions; such FRFs with adequate sanction possibilities seems to be more successful comparing FRFs without such possibilities; the existence of escape clauses in case of vis maior circumstances (war, natural disasters, and so on), it should be stated that too generous escape clauses can question the credibility and the effectivity of FRF; the existence of cyclical considerations, for instance the establishment of special funds as to support anti-cyclical expenditure, this sort of funds can strengthen the credibility and the effectivity of FRF.

The Recent Situation in Hungary The economic background for Hungarian public finances is rather poor, but definitively not in the same league as Greece or Spain, and what is more promising: the recent years tendency has shown a definitive progress to the responsible, and hopefully sustainable financial governance, a higher level of financial discipline. The poor economical circumstance can be summarised as follows: the economic growth in Hungary is around zero, even a slight recession can be forecast7; the budgetary deficit in 2012 expectably will not be higher than three percentage of GDP; which means that first time in its history Hungary will be able to fulfill the relevant reference value of the Maastricht deficit criterion and will have a great chance to be freed from the EU excessive deficit procedure (depending on the decision of the European Commission will be made in November this year) 8; the Hungarian state debt in 2012 is 77 percent of the Hungarian GDP, it keeps, however, to the good direction owing to the recent governments firm commitment to reduce the public debt level, which resulted an almost five percent cut until now9, the tendencies of the last two decades can be seen in Table 1; in addition to the high level of Hungarian state debt, the composition of it is not a lucky one, because most of the debt are unfortunately in foreign currencies, especially in euro, US dollar and yen; during the last years there were some minor difficulties concerning the Hungarian state debt management, some minor obstacles concerning the sales of Hungarian state bonds, such as the growing level of state bond yields (almost 7 percent, which is a unfortunate burden for future state budgets), or the extremely high level of credit
7

Hungary has traditionally got a typical open economy, which means that its economical growth, so its future GDP forecast is largely influenced by the main partners (first and foremost Germany) GDP growth. 8 Onwards from its European Union membership (2004) Hungary was a subject to the EU excessive deficit procedure due to its high annual deficits sometimes close to 10 percent of Hungarian GDP. 9 When the recent government entered into power in 2010 the Hungarian state debt excessed the 80 percent of GDP, and showed a very dramatic course in comparison with the 2001 data of 52 percent of GDP (i.e. the relevant Maastricht criterion was fulfilled at that time), with no doubt it was an indisputable sign of the 20022009 Hungarian governments great inclination to fiscal alcoholism.

default swaps (CDS, close to 700 in January, 2012); luckily the recent situation seems to be stabilised, for example the CDS value in October is less than half of the January value.

Table 1: The Hungarian Public Debt 1990-2012

Source: Hungarian Central Statistic Office

Fiscal Rules in Hungary As the legal (or statutory) part of the Hungarian Fiscal Responsibility Framework firstly it must be mentioned that real fiscal rules (as defined in previous chapters) exist only from 2009 in our legal system. Before that there were no relevant rules neither on constitutional nor on cardinal laws level. The Constitution of the Hungarian Republic did not contain any sort of fiscal rules, even it did not contain with the exceptions of the fundamental regulation of State Audit Office on one hand, and some fundamental regulations of local government finances on the other any relevant legal rules concerning public finance10. This bad situation has changed, fortunately, in two steps. In the first step at the end of 2008 the Parliament enacted the Act of LXXV of 2008 on Fiscal Responsibility and Efficient Fiscal Management, as a national fiscal responsibility law. This act had emerged firstly as a necessary answer to the 2008 financial crisis and the
10

The reason of this can be explained mainly by the fact that during the Change of Regime (1989-1990) the old Socialist Constitution had been amended and supplemented, which meant that brand-new parts had emerged only in cases of brand-new institutions (such as local governments or State Audit Office).

worsening situation of Hungarian public finances, secondly as a stipulation from that years tripartite contract between the International Monetary Fund, the European Commission and the Republic of Hungary; a condition that Hungary had to implement. Among others the Act LXXV of 2008 introduced several both numerical and procedural fiscal rules, and established the Fiscal Council as an auxiliary body of the Hungarian Parliament. In the second, and one has to add to it, the breakthrough step in 2011 the whole Hungarian public finances, including fiscal rules had been newly, totally and coherently regulated. The result of this re-regulation has embodied in three parliamentary laws of outstanding relevance as follows11: the Basic Law of Hungary (that is our new constitution)12; the Act CXCIV of 2011 on the Economic Stability of Hungary, which is a so-called cardinal law (needing two-third parliamentary majority); the Act CXCV of 2011 on Public Finances, which is contrary to the stability act mentioned above is only an ordinary law (needing only a simple parliamentary majority). The Basic Law of Hungary differing totally from its predecessor regulates all the relevant aspects of public finances13 in a subchapter, including the most significant fiscal (both operational and institutional) rules. The Economic Stability Act as a cardinal law regulates several aspect of public finances (covering taxation and pension scheme issues, too), among these a group of operational fiscal rules affecting public debt and two institutional fiscal rules (concerning the Fiscal Council and the State Debt Management Center, respecitvely) can be found. As far as our third law is concerned it is the less relevant act among these. The Public Finance Act from this studys point of view is a law existing only in the shadow of the Basic Law of Hungary and the Economic Stability Act, it comprises the detailed regulations, the executive rules, especially financial managerial and budgetary procedural ones. Analyzing the Basic Law and the Economic Stability Act the recent Hungarian fiscal rules can be classified as follows: a) operational fiscal rules, such as: state debt limit rule concerning the annual budgets, state debt limit rule concerning the budgetary execution,
11

Parallel to the enactments of new laws the Act LXXV of 2008, as a necessary step due to the new coherent regulations, was eliminated. 12 The Basic Law of Hungary was created by the Hungarian Parliament on the 25th of April, 2011; that is why it is often called as the Easter Constitution. 13 A/ Concerning the public finances as a whole see: Zsolt Halsz: Public Finances. In: The Basic Law of Hungary. A first commentary. (Eds.: L. Csink B. Schanda A. Zs. Varga), Clarus Press NIPA, Dublin, 2012. B/ Concerning the outstanding role of Parliament in public finances see: Pter Smuk: The Parliament. In: The Basic Law of Hungary. A first commentary. (Eds.: L. Csink B. Schanda A. Zs. Varga), Clarus Press NIPA, Dublin, 2012.

 public funding limitation rule, local government borrowing rule, b) institutional fiscal rules, such as: the regulation of Fiscal Council, the regulation of State Debt Management Center.

State debt limit rules State debt limit rules can be divided on the ground of their connection to the state budgetary cycle. Firstly these rules affects the Parliaments budgetary rights in the budget decision making phase of budgetary cycle, secondly these rules have to be applied during the budget execution phase of budgetary cycle. According to the Basic Law 14 the Hungarian Parliament is prohibited to enact such an annual budget act which can result a state debt excessing more than half of the Hungarian GDP. Similarly an other constitutional provision 15 does not allow any state borrowing or any other kind of financial commitments (e.g. financial guarantees, financial leasing, contracts with re-buying option) which can cause a higher state debt level than half of the Hungarian GDP. Therefore the constitutional fiscal rule for public debt in Hungary is 50 percent of GDP as a maximum level (constitutional state debt limit). So it is lower than the relevant Maastricht criterions reference value of 60 percent of GDP as well as other European state debt limit values, for instance the limit equivalent to the Maastricht value in Polands Constitution. However, as we mentioned before, the recent economical situation is worse (recently our state debt is 77 percent), which situation needs transitional fiscal rules concerning public debt issue. These transitional rules, one should name these rules as debt brake rules, can be summarised as follows: in the budget decision making phase: until the constitutional state debt limit will be achieved the Parliament is entitled to enact such budget laws which should result in state debt reduction in comparison with previous budgetary year; during the budget execution phase: until the constitutional state will be achieved there is no possibility to borrow (or to take other commitments resulting equivalent effects to borrowing) which cause a growth in the proportion of state debt. With special attention to vis maior and other extraordinary situations the Basic Law of Hungary contains some escape clauses, too 16. The escape clauses relating state debt rules cover the emergency situations (natural and industrial disasters, war, etc.) on one hand, and the extreme recession of Hungarian national economy on the other. However, the escape
14 15

See Basic Law of Hungary, Article 36. par. (4). See Basic Law of Hungary, Article 37. par. (2). 16 See Basic Law of Hungary, Article 36. par. (6).

clauses have got their own constitutional limits: 1) in the case of an emergency situtation the application of the escape clause should be proportional with the level which is necessary to mitigate the negative consequences (damages) of the case in question; 2) in the case of extreme economical recession the escape clause entitles the budgetary policy makers or executives to take financial measures to the level which is necessary to the restitution of national economys equilibrium.

Public funding limitation rule The aim of this constitutional fiscal rule17 avoiding that public money streams out from public budgets to such private organisations or persons which can not fulfill the requirements rooted from the principle of transparency. In order to achieving this aim the Basic Law absolutely prohibits any financial support or other payments from state budget to a private organisation (or person) without a clear and transparent 1) ownership composition, 2) organisational structure, and/or 3) procedural rules concerning its activity during which the public money would be spent.

Local government borrowing rule During the last decade many local governments (especially in big towns and in the capital, including its districts) have found itself in its own debt trap due to its inefficient financial management or irresponsible financial commitments18. The volumen of local government debts affects the total public debt level in a highly negative way. In order to avoid this problem for the future the Basic Law created a constitutional base for the limitation of local governments borrowing19. Based on this constitutional fiscal rule the Economic Stability Act contains a general rule (i.e. with some exceptions) on the ground of which any local government borrowing (or other transactions with equivalent effects) should be approved a priori by the government offices.

The Fiscal Council The Fiscal Council (as a brand new organ among the Hungarian public finance institutions) was originally established by the Act LXXV of 2008 on Fiscal Responsibility and Efficient Fiscal Management. However, in its original form the Fiscal Council proved to be a temporary financial institution, because the Basic Law of Hungary reformed it in a significant measure in 201120.
17 18

See Basic Law of Hungary, Article 39. par. (1). A typical debt trap among Hungarian local governments has rooted in development projects financed largely through borrowing (bank credits, local government bonds). 19 See Basic Law of Hungary, Article 34. par. (5). 20 See Basic Law of Hungary, Article 44.

In its renewed form the Fiscal Council a body consists of three members, the president of the council appointed by the Hungarian President of Republic for a six-year term, and two other members ex officio: the president of the Hungarian National Bank (as a representative of the monetary side of finances), and the president of the State Audit Office (as a representative of the fiscal side of finances). The Fiscal Council is a supporting body to the Parliaments legislature activity concerning state budgets. Its scope of activity covers two main tasks detailed by the Economical Stability Act, such as: makes opinion concerning the annual state budget plan (i.e. in its preparational phase before the Government submits the state budget bill to the Parliament), this right of opinion concerns the budget plan as a whole; approves a priori that the Government can submit the state budget bill to the Parliament, or denies to approve the submission; the denial, however, can be possible only in one case when according to the council the state budget bill breaches the state debt limit rules (as it was shown above);

The State Debt Management Center The State Debt Management Center is an integral part of the Hungarian public financial system almost two decades ago, functioning in a legal status of a limited company owned by only the State. Its main functions as it is circumscribed by the Enonomical Stability Act are the determination of the state budgets financing strategy, the preparation of annual plans for financing activities concerning state budgets deficit, and the management of these financing activities.