## _cr0711 - EXECUTIVE SUMMARY ## Source details **Canonical URL:** [_cr0711 - EXECUTIVE SUMMARY](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr0711.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr0711.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr0711.pdf.json) --- ### Overview - Purpose: Assessment of fiscal transparency practices in Hungary against the IMF Code of Good Practices on Fiscal Transparency, based on discussions with the authorities, the authorities’ response to the IMF fiscal transparency questionnaire, and other sources of information. - Reference: The IMF Manual on Fiscal Transparency is recommended for further explanation of terms and concepts discussed in the report. - Mission timing and team: Discussions held in Budapest during May 4–18, 2006. IMF staff team: Mr. Hemming (Senior Advisor), Mr. Robinson (Head), Ms. Corbacho, Ms. MacFarlane (Fiscal Affairs Department), and Mr. Zwerk (expert). ### Progress since the 2001 ROSC - Fiscal reporting now covers virtually all of general government, a significant improvement from 2001 ROSC. - The range of central government institutions for which expenditure is subject to appropriation in the Annual Budget Law (ABL) is wide by international standards. - Institutional strengthening: - Strengthened internal and external audit. - Tighter procurement policy. - The “Glass Pockets” anti-corruption initiative. ### Main concerns and recent problematic practices - Government has on several occasions relied on transactions that reduce the measured deficit and debt without changing the underlying fiscal position. - Case example — State Motorway Company (AAK): - A 2006 proposed arrangement to move off-budget the expenditure and debt arising from construction of new motorways via AAK would have reduced the reported fiscal deficit by an estimated 0.6 percent of GDP in 2006 and 0.9 percent in 2007. - Eurostat previously ruled against a related 2005 transaction to classify sale receipts as general government revenue, resulting in the 2005 budget deficit (on ESA95 basis) being increased by 2 percent of GDP. - In September 2006 the government revised its Convergence Program to account for motorway construction costs in general government expenditures and to classify AAK within general government. ### Budget coverage and sector definitions - Three sectoral concepts in Hungarian public finance: General government; Legal government (a subset of general government); State budget sector (a subset of legal government). - Budget covers only the state budget sector as defined by the Act on Public Finance (PFA): (i) central budgetary institutions; (ii) the social security funds (Pension Fund and Health Care Fund); and (iii) certain extrabudgetary funds. - Elements of general government not covered by the budget include local government and certain central government units; units outside the state budget sector are responsible for about a third of general government expenditure. - General government reporting: Fiscal reports present annual outcomes both on an ESA95 and a GFS86 basis. - Expenditure 2004 (In percent of GDP): - 47.2 - 34.4 - 21.1 - 12.7 - 0.6 - 12.8 - 2.4 ### Nonfinancial public enterprises (NFPEs), quasi-fiscal activities (QFAs), and transfers - NFPEs with significant QFAs include Hungarian State Railways (MAV), Budapest Public Transport Company (BKV), and other transport companies; QFAs also present in water, electricity, and gas sectors. - Pricing and implicit subsidies: - In transport the discrepancy between consumer prices and cost recovery is large; in gas and electricity implicit subsidies prevail despite efforts since 2003 to better align prices with costs. - By mid-2007 the government plans partial liberalization of the gas market and full liberalization of the electricity market. - Transfers and subsidy arrangements: - Arrangements regulating transfers between NFPEs and the budget are unclear. - Dividend payments are generally set on an ad hoc basis (except for NFPEs managed by the Privatization and State Holding Company (APV)). - Annual budgetary transfers to subsidize loss-making NFPEs have been ad hoc and generally insufficient, leading enterprises to borrow—typically with government guarantees. - Borrowing has been substantial in MAV and BKV, with the government assuming liabilities on several occasions. - The September 2006 Convergence Program stated that operating subsidies would be clearly defined in public service contracts and would reflect the entire cost of efficient delivery of the service. ### Privatization and APV - Privatization largely complete; about 80 percent of the economy is in private hands. - The Privatization Act regulates the process and lists enterprises under long-term state ownership. - APV: - Remains formally outside the state budget sector, but government expenditure from its reserves and income must be approved in the ABL. - An appendix to the budget presents APV’s revenue and expenditure. - Reports on APV operations and equity holdings are prepared quarterly and are publicly available. - External audits performed according to the Act on Accounting, with auditor selected through tender by the State Audit Office. ### Key recommendations and areas for further improvement - Align budget coverage with ESA95: progressively bring within the budget certain central general government bodies currently not covered to align with the ESA95 concept of general government. - Adopt ESA95 accounting principles and practices. - Strengthen the medium-term fiscal framework: - Establish a stronger link between annual fiscal targets in the budget and medium-term fiscal objectives consistent with the Maastricht criteria. - Consider multiyear expenditure targeting as a tool to anchor fiscal adjustment needed to achieve medium-term objectives. - Expand fiscal risk reporting and analysis. - Expand fiscal sustainability analysis, including the fiscal impact of an aging population. - Improve independent scrutiny of fiscal policy: consider establishing an independent expert advisory council. - Improve budget process focus: tailor the budget process to link funding decisions more directly to assessments of where public funds can most effectively be spent. - Prohibit future recourse to transactions that move expenditure and debt off-budget without changing the underlying fiscal position. * _cr0711 - EXECUTIVE SUMMARY_* --- ### 6. Government regulation of the private sector — selected findings - Business regulatory environment: - Hungary rated number 52 out of 155 countries in the IFC Doing Business composite index. - Hungary rates 119th in licensing requirements. - Hungary rates 96th in registering property. - Heritage Foundation 2006 Index of Economic Freedom gives Hungary a rating for business regulation of 3 on a scale from 1 (best) to 5 (worst). - Government relations with the central bank (MNB): - MNB legally independent; no role in financing the fiscal deficit. Act on the MNB (Act LVIII of 2001) prohibits MNB financing of the government fiscal deficit and grants operational autonomy. - Exchange rate policy is a shared responsibility; Hungary follows an exchange rate band. - Public financial institutions (PFIs): - Hungarian Development Bank (MFB): supports infrastructure, housing, agriculture, SMEs, family doctors; issues bonds denominated in foreign currency and lends in domestic currency; government assumes currency risk within a limit set in the ABL. - Hungarian Export-Import Bank (Eximbank): supports exporters; government guarantees issued if export operation is of national economic interest. - Credit Guarantee Company: provides unconditional payment guarantees to small- and medium-size companies. - QFAs undertaken by PFIs are covered by the budget through clear and regulated payment mechanisms. - Fiscal roles of branches of government: - Parliament may change the draft budget proposed by the executive without restriction; fiscal powers and responsibilities of the executive specified mainly in the PFA. - Fiscal management across levels of government: - Act on Local Self-Government (ALSG) (Act LXV of 1990) specifies local responsibilities and revenue powers. - Recent actions created uncertainty in local government revenue bases: - Decision in 2005 to abolish the local business tax with effect from 2008 (subsequently reversed in July 2006). - 2006 ABL provision withheld approximately 1.5 percent of the local government share of personal income tax to be released at central government discretion. - Wages of local government employees largely set by national government; large central pay increases in 2002 significantly affected local finances. - Legislative limits on local government borrowing: S.88(2) of the ALSG imposes a limit of 70 percent of “adjusted” own-source revenue; limits do not apply to local government public enterprises (such as the BKV). - Legal and administrative framework for budget management: - PFA is the organic budget law; detailed provisions in the ABL. - Coverage gap: certain general government bodies are not part of either the state budget sector or legal government. - Several annual budget appropriations are estimates rather than limits; some agencies may spend more than appropriated without parliament increasing the appropriation. - A PFA requirement obliges government to submit an amendment to the Annual Budget to parliament if excess expenditure will increase the aggregate budget deficit by 2.5 percent or more; if variation exceeds 5 percent, a supplementary budget bill must be submitted. - Recommendations: eliminate provisions permitting appropriation overruns for non-mandatory expenditure; specify permitted overruns with reference to total spending on relevant programs; when fiscal adjustment is a priority, temporary suspension of overrun provisions may be justified; any expenditure overrun that increases the fiscal deficit should be approved by the legislature. - Coordination and management of budgetary and extrabudgetary activities: - Social security funds and “extrabudgetary funds” defined by the PFA are part of the state budget sector; their funds are part of the Treasury Single Account (TSA). - Central government units outside legal government are not covered by the budget, though finances generally well coordinated with the budget. - Improvement since 2001 ROSC: General government expenditure financed from APV revenue must now be approved by parliament in the budget. ### Tax policy, administration, and public service ethics - Tax legislation: Rules of Taxation Act (Act XCII of 2003); VAT Act (Act LXXIV of 1992); Personal Income Tax Act (Act CXVII of 1995); Corporate and Dividend Tax Act (Act LXXXI of 1996). - Tax expenditures are large; family tax credits and tax credits for wage earners among the largest. Eligibility for family tax credits tightened in late 2006. - APEH (tax administration): - Organized by function with a special tax office for large taxpayers; collects major taxes and social security and health contributions. - Service channels include face-to-face consultations, headquarters call center, website, electronic filing. - Need for increased administrative powers to deal more effectively with late tax returns and late payment. - Taxpayers have right of appeal; advance tax rulings are binding on APEH. - Public service ethics: - Act on Legal Status of Public Servants (Act XXXVI of 2001) includes conflict of interest, property declaration, and limitations, but does not amount to a robust code of conduct covering training, promotion, compliance monitoring, or whistleblower protection. - Recommendation: establish a well-defined code of conduct to aid in fighting corruption. ### Open budget preparation, execution, and reporting (calendar and monitoring) - Annual budget process: calendar year basis; timetable includes drafting in January and parliamentary approval by end-December (Box 3 steps preserved in process). - Multiple fiscal indicators referenced in budget documents complicate public debate: state budget sector, legal government, ESA95 general government, Maastricht criteria (ESA95 adjusted for debt swaps). - Within-year monitoring is essentially limited to the state budget sector on a cash basis; MoF does not report on the overall fiscal position of the public sector despite operating losses of some public enterprises. - MNB constructs an indicator of the overall balance of general government consolidated with key QFAs and contingent liabilities to provide broader coverage. ### Procurement, accounting, and audit - Procurement rules: Act on Public Procurement CXXI of 2003; “Glass Pockets” transparency threshold 5 million HUF (approximately US$27,000). - Accounting and internal control: - Standardized accounting system records cash and many accrual transactions; government is working to bring it into full conformance with ESA95 (full accrual basis). - All state budget sector units are part of the TSA. - Internal audit: - Government decree 193/2003 (XI.26), amended by decree 70/2004 (IV.15), establishes internal audit system and functional independence; further work needed on risk-based internal audit planning and professional cadre development. - Government Control Office oversees and supports internal audit and audits the use of EU funds. - Civil service employment procedures: - Chapter III of Act Legal Status of Public Servants (Act XXIII of 2001) regulates employment; open competitive recruitment processes are not the norm. --- ### 22. Budget forecasts and underlying macroeconomic assumptions - Macroeconomic forecasts underpinning the budget prepared and published by the MoF; underlying forecasting models are not publicly available. - Hungary’s medium-term fiscal policy objectives: comply with Maastricht fiscal rules on overall balance of general government and gross public debt. - Three main economic planning systems: EU Convergence Program, National Development Plan, annual budget. - Critical problems: - Lack of sufficient detail or adequate quantification of policies to support medium-term objectives. - The three planning systems developed largely independently; budget documents reference Convergence Program objectives only in broad terms. - Budgetary resource envelopes do not bear a close relationship with the public investment strategy of the National Development Plan. - A medium–term budget framework capable of supporting medium-term fiscal targets has yet to be developed. - Fiscal sustainability analysis limited to projections of pension expenditure (in an appendix); estimates of other age-related spending not presented. - Convergence Program discusses debt projections consistent with proposed fiscal targets, but a full debt sustainability analysis is not prepared. ### Costing of initiatives, fiscal risks, and PPPs - Estimates of cost of new initiatives and ongoing policies are not clearly distinguished in budget documents. - Budget documents contain little information on fiscal risks other than government guarantees: - An appendix provides estimates of debt guarantees expected to be called in the budget year; methodology is not open to external scrutiny. - No data or discussion of risks related to macroeconomic variables, QFAs, or PPPs. - Convergence Program presents estimates of the impact of the economic cycle on the overall fiscal balance but no sensitivity analysis of fiscal position to changes in key variables. - Budget documents contain a summary table of PPP operations, total expected cost, and estimated impact of availability fees on the budget in coming three years. - Lack of clear accounting and institutional framework for PPPs implies important fiscal risks not transparently disclosed. - Recommendation: accelerate moves to quarterly reporting on an ESA95 basis; quarterly reports should be public and submitted to parliament and contain analysis of deviations of fiscal aggregates from planned path. - Debt reporting by AKK should be extended from the state budget sector to general government. ### Accounting, fiscal reporting, and audit timeliness - Accounting system can produce accurate within-year reports on state budget execution; monthly budget execution reports published on MoF website by the end of the following month (labelled “general government” but cover state budget sector). - Quarterly ESA95 reports compiled for internal use and reporting to Eurostat, but report quality needs further improvement. - Audited final accounts available within twelve months of the end of the fiscal year; PFA requires final accounts be provided to parliament within eight months of year-end. - Legislature does not undertake a mid-year budget review and is not presented with in-year budget execution reports (though such reports are public). ### Results-oriented budgeting and public availability - Objectives and expected results from government activities discussed only in general terms; no performance information presented. - Fiscal information is fairly comprehensive and readily available; monthly and annual reports on state budget sector are public. - Budget documents—including appendices and general explanatory documents—are available only in Hungarian. - Budget documents disclose main fiscal aggregates for two years prior to the budget year and provide original appropriations rather than estimated outturns for the year prior to the budget year. - Convergence Programme of September 2006 anticipates that starting with the 2007 budget, the ABL will define expenditure appropriations for ministries and certain other agencies in nominal terms for three years ahead. --- ### 46. Data reliability and variance between budget and actual outturns - Data on budget outcomes on a cash basis are mostly reliable and the variance between budgeted and actual outturns for the main fiscal aggregates is disclosed to the public. - Average percentage differences (average of the absolute values) over 2002, 2003, and 2004: - Between budgeted and actual primary expenditure: 12 percent. - Between budgeted and actual tax revenue: 12 percent. - Deviations between budget estimates and outcomes are explained in the final accounts. - Key budget figures (Revenue and Expenditure of the State Budget Sector, 2002–04, in billions of HUF): - 2002 - Primary expenditure: Original 3,842; Actual 5,098 - Interest payments: Original 669; Actual 660 - Capital expenditure: Original 770; Actual 1265 - Nontax revenue: Original 460; Actual 351 - Tax revenue: Original 4,070; Actual 4,357 - 2003 - Primary expenditure: Original 4,595; Actual 4,868 - Interest payments: Original 657; Actual 728 - Capital expenditure: Original 761; Actual 767 - Nontax revenue: Original 352; Actual 387 - Tax revenue: Original 4,740; Actual 4,938 - 2004 - Primary expenditure: Original 5,379; Actual 5,362 - Interest payments: Original 690; Actual 801 - Capital expenditure: Original 974; Actual 860 - Nontax revenue: Original 429; Actual 524 - Tax revenue: Original 5,479; Actual 4,147 - Source: Hungarian authorities. ### Independent external oversight - Supreme Audit Office (SAO) independent of the executive, established by the Constitution as an organ of parliament; chairman and two vice-chairmen elected for 12-years by parliament. - SAO reports largely public with formal ministerial responses possible within eight working days. - No parliamentary public accounts committee charged with review of SAO reports; Budget Committee’s role confined to draft budget and legislation with financial impacts. - No significant external scrutiny of macroeconomic models and assumptions; MoF’s model not publicly available. - Hungary subscribes to the IMF SDDS and meets the timetable for providing data on central administration and general government operations. ### IMF staff commentary — progress and remaining shortcomings - Improvements since 2001 ROSC: wider range of fiscal activities and QFAs brought under state budget and PFA; fiscal data reported on general government basis consistent with ESA95 and GFSM 2001; strengthened audit and procurement reforms. - Remaining shortcomings: coverage of the budget; fiscal reporting; medium-term fiscal framework; debt sustainability analysis; fiscal risk analysis; independent scrutiny of macroeconomic models and assumptions; budget outcomes and performance; limited availability in English of Hungarian budget documentation. ### Medium-term fiscal framework and expenditure targeting (Box 5 key points) - Design of expenditure targeting frameworks: - Target broad-based expenditure aggregates to reduce risk of creative accounting; some exclusions may be justified. - Some disaggregation of spending ceilings can be useful but should not impose excessive rigidity; lower-than-expected expenditure should generally be saved. - Rolling targets or legislature-fixed targets with limited contingency provisions are options. - Nominal targets are easier to monitor and can support countercyclical policy, but can lead to disruptive cuts in real spending when inflation is high. - Cash and accrual based targets can be complementary. --- ### 63. Longer-term fiscal analysis, fiscal risk analysis, and independent scrutiny - Longer-term fiscal analysis: - Need to develop a fuller understanding of the future fiscal implications of the aging population to encourage adjustment measures addressing immediate, medium-term, and longer-term fiscal pressures. - Measures contributing to fundamental social protection and health care reform identified as relevant. - Fiscal risk analysis: - Hungary currently reports guarantees transparently; Convergence Program contains some analysis of macroeconomic projection risk. - A supplementary report to the budget should broaden coverage to identify and, if possible, quantify key sources of fiscal risk. - Special attention should be paid to fiscal risks arising from PPPs. - Fiscal risk analysis should look beyond guarantees, account for uncertainties in forecasts and projections, pay attention to range of possible outcomes to counter optimism bias, and recognize correlated risks in debt sustainability analysis. - Independent scrutiny: - SAO can report on the “basis for the budget” and has warned about optimism bias; fiscal targets are routinely missed. - External scrutiny from IMF, OECD, EU surveillance; MNB publicly comments on fiscal policy but fiscal watchdog role should preferably be performed by other institutions. - Options to increase internal scrutiny: - Strengthen SAO mandate to require judgments on fiscal policies (with caveats about capacity and mandate). - Alternative: set up an expert advisory council with mandate to provide an independent view on fiscal policy. - Budget outcomes and performance (performance budgeting recommendations): - Specify objectives of public expenditure in terms of intended outcomes. - Classify expenditure by objectives; replace input-based allocations with program allocations. - Develop performance indicators, program evaluation, and methods for program performance information. - Modify budget process to focus on allocation choices and strengthen ministry capacity to implement performance management. ### Summary of historical ROSC findings (selected) - 2001 Full ROSC: significant progress in transparency and accountability; recommended bringing APV activities into central government budget and improving reporting of QFAs, tax expenditures, and performance budgeting. - May 2002 ROSC Update: fiscal activities still conducted outside MoF purview (APV, MFB); PFA amended late 2001 for reporting; recommendation to ensure off-budget spending is reported timely and comprehensively. - April 2003 ROSC Update: APV consolidated on ESA95 basis though outside central budget; some QFAs eliminated; rolling three-year fiscal program abandoned in 2003; recommendations reiterated to bring APV within central budget and quantify QFAs and tax expenditures. - April 2004 ROSC Update: improvements in reporting and limitations on privatization receipts use; some reversals and continued issues with additional spending without supplementary appropriations; recommendations reiterated. ### Summary assessment of practice (selected points) - Overall compliance with the Code of Good Practices on Fiscal Transparency in many respects; important areas require further improvement, notably discontinuation of transactions that improve apparent but not actual fiscal position. - Budget documents and annual budget execution reports cover most general government fiscal activities and report consolidated fiscal position, but provide limited information on QFAs and contingent liabilities and do not present medium-term projections in budget documents. - Budget estimates are not a reliable indicator of actual budget outcome. - External audit is independent and provides timely reports, but there is no significant external scrutiny of macroeconomic models and assumptions. --- ### Appendix III — Public Availability of Information (selected entries) - 1. Central government (CG) budget estimates: Included in budget/report documents: Yes, following legal government definition (Box 1). Available to the public: Yes. Para ref.: 39. Code ref.: 2.1.1 - 3. CG EBFs: Included: Partially. Social Security Funds and other “Extrabudgetary Funds” defined in the PFA included; a number of central government bodies outside legal government which are true EBFs are not covered in the budget documents (Box 1). Available to the public: Yes. Para ref.: 39 and 3. Code ref.: 2.1.1 - 4. CG Budget outturns: Included: Yes. Budget documents include main aggregates for the state budget sector for the fiscal outturn 2 years prior to the budget year and previous year budget appropriation. Available to the public: Yes. Para ref.: 41. Code ref.: 2.1.2 - 5. CG Budget forecasts: Included: No. Para ref.: 41. Code ref.: 2.1.2 - 6. CG Contingent liabilities: Included: Annex on debt guarantees of debt budget sector, with probable cost estimate, and appropriation in the budget. No other contingent liabilities reported. Available to the public: Yes. Detailed reporting on guarantees. Para ref.: 42. Code ref.: 2.1.3 - 8. CG QFAs: Included: No. Available to the public: No. Para ref.: 42. Code ref.: 2.1.3 - 9. Macroeconomic assumptions: Included: Yes. Annex to the budget. Available to the public: Yes. Para ref.: 22. Code ref.: 3.1.3 - 10. Analysis of fiscal risks/sensitivity analysis: Included: Partial. Annex on debt guarantees of state budget sector only. Available to the public: Yes. Para ref.: 25 and 41. Code ref.: 3.1.5 - 12. Sustainability Analysis: Included: Partial. Annex on medium term pension expenditures. Available to the public: Yes. Para ref.: 23. Code ref.: 3.1.1 - 14. CG Monthly reports on fiscal outturn: Included: Yes. Published three weeks after the end of the month. Available to the public: Yes. Para ref.: 33, 45. Code ref.: 3.4.1 - 15. General government quarterly reports on fiscal outturn: Included: Submitted to the EU but not published. Available to the public: No. Para ref.: 33. Code ref.: 3.4.1 - 16. CG Final Accounts: Included: Partially. Final accounts of legal government, audited by SAO, go to parliament within eight months after year-end. Available to the public: Yes. Para ref.: 36. Code ref.: 3.4.2 - 17. Consolidated general government Final Accounts: Included: No. Available to the public: Yes/internet. Para ref.: 38. Code ref.: 3.4.2 * _cr0711 - EXECUTIVE SUMMARY_* ### EXECUTIVE SUMMARY ### _cr0711 - EXECUTIVE SUMMARY ### Overview - Purpose: Assessment of fiscal transparency practices in Hungary against the IMF Code of Good Practices on Fiscal Transparency, based on discussions with the authorities, the authorities’ response to the IMF fiscal transparency questionnaire, and other sources of information. - Reference: The IMF Manual on Fiscal Transparency is recommended for further explanation of terms and concepts discussed in the report. - Mission timing and team: Discussions on fiscal transparency were held in Budapest during May 4–18, 2006. The IMF staff team comprised Mr. Hemming (Senior Advisor), Mr. Robinson (Head), Ms. Corbacho, and Ms. MacFarlane (all from the Fiscal Affairs Department), together with Mr. Zwerk (expert). ### Progress since the 2001 ROSC - Improved fiscal reporting coverage: - Fiscal reporting now covers virtually all of general government, a significant improvement from the position at the time of the 2001 ROSC. - Expanded budget appropriation: - The range of central government institutions for which expenditure is subject to appropriation in the Annual Budget Law (ABL) is wide by international standards. - Institutional strengthening: - Strengthened internal and external audit. - Tighter procurement policy. - The “Glass Pockets” anti-corruption initiative. ### Main concerns and recent problematic practices - Use of transactions that alter measured fiscal aggregates without changing underlying fiscal position: - The government has on several occasions relied on transactions that reduce the measured deficit and debt without changing the underlying fiscal position. - Case example — State Motorway Company (AAK): - A 2006 proposed arrangement to move off-budget the expenditure and debt arising from construction of new motorways via AAK would have reduced the reported fiscal deficit by an estimated 0.6 percent of GDP in 2006 and 0.9 percent in 2007. - Government rationale included assertions that AAK was a public corporation (a PPP), that construction and availability risk would transfer to AAK, and that economic ownership would rest with AAK despite legal ownership remaining with the State. - Eurostat previously ruled against a related 2005 transaction to classify sale receipts as general government revenue, resulting in the 2005 budget deficit (on ESA95 basis) being increased by 2 percent of GDP. - In September 2006 the government revised its Convergence Program to account for motorway construction costs in general government expenditures and to classify AAK within general government. ### Budget coverage and sector definitions - Three sectoral concepts in Hungarian public finance: - General government. - Legal government (a subset of general government). - State budget sector (a subset of legal government). - Budget coverage: - The budget covers only the state budget sector as defined by the Act on Public Finance (PFA): (i) central budgetary institutions; (ii) the social security funds (Pension Fund and Health Care Fund); and (iii) certain extrabudgetary funds. - Elements of general government not covered by the budget include local government and certain central government units (see Box 1). - Together, units outside the state budget sector are responsible for about a third of general government expenditure. - General government reporting: - Fiscal reports present annual outcomes both on an ESA95 and a GFS86 basis. - Expenditure 2004 (In percent of GDP): - 47.2 - 34.4 - 21.1 - 12.7 - 0.6 - 12.8 - 2.4 ### Nonfinancial public enterprises (NFPEs), quasi-fiscal activities (QFAs), and transfers - NFPEs with significant QFAs: - Examples include Hungarian State Railways (MAV), Budapest Public Transport Company (BKV), and other transport companies; QFAs also present in water, electricity, and gas sectors. - Pricing and implicit subsidies: - In transport the discrepancy between consumer prices and cost recovery is large; in gas and electricity implicit subsidies prevail despite efforts since 2003 to better align prices with costs. - By mid-2007 the government plans partial liberalization of the gas market and full liberalization of the electricity market. - Transfers and subsidy arrangements: - Arrangements regulating transfers between NFPEs and the budget are unclear. - Dividend payments are generally set on an ad hoc basis (except for NFPEs managed by the Privatization and State Holding Company (APV)). - Annual budgetary transfers to subsidize loss-making NFPEs have been ad hoc and generally insufficient to fully cover QFAs, leading enterprises to borrow—typically with government guarantees. - This borrowing has been substantial in MAV and BKV, with the government assuming liabilities on several occasions. - The September 2006 Convergence Program stated that operating subsidies would be clearly defined in public service contracts and would reflect the entire cost of efficient delivery of the service. ### Privatization and APV - Privatization process: - Largely complete; about 80 percent of the economy is in private hands. - The Privatization Act regulates the process and lists enterprises under long-term state ownership. - Role and reporting of APV: - APV remains formally outside the state budget sector, but government expenditure from its reserves and income must be approved in the ABL. - An appendix to the budget presents APV’s revenue and expenditure. - Reports on APV operations and equity holdings are prepared quarterly and are publicly available. - External audits performed according to the Act on Accounting, with auditor selected through tender by the State Audit Office. ### Key recommendations and areas for further improvement - Align budget coverage with ESA95: - Progressively bring within the budget certain central general government bodies currently not covered to align with the ESA95 concept of general government. - Adopt ESA95 accounting principles and practices. - Strengthen the medium-term fiscal framework: - Establish a stronger link between annual fiscal targets in the budget and medium-term fiscal objectives consistent with the Maastricht criteria. - Consider multiyear expenditure targeting as a tool to anchor fiscal adjustment needed to achieve medium-term objectives. - Expand fiscal risk reporting and analysis. - Expand fiscal sustainability analysis, including the fiscal impact of an aging population. - Improve independent scrutiny of fiscal policy: - Consider establishing an independent expert advisory council. - Improve budget process focus: - Tailor the budget process to link funding decisions more directly to assessments of where public funds can most effectively be spent. - Prohibit future recourse to transactions that move expenditure and debt off-budget without changing the underlying fiscal position. * _cr0711 - EXECUTIVE SUMMARY_* ### 6. Government regulation of the private sector is complex, although there have ### 6. Government regulation of the private sector is complex, although there have been improvements in some areas ### Business regulatory environment - Hungary’s business regulatory regime is largely shaped by European standards. - Transparency and consistency in application of business regulation require further improvement. - Key indicators: - Hungary is rated number 52 out of 155 countries in the International Finance Corporation’s Doing Business composite index of the ease of doing business. - Hungary rates 119th in licensing requirements. - Hungary rates 96th in registering property. - In its 2006 Index of Economic Freedom, the Heritage Foundation gives Hungary a rating for business regulation of 3 on a scale from 1 (best) to 5 (worst). ### Government relations with the central bank (MNB) - The National Bank of Hungary (MNB) is legally independent and has no role in financing the fiscal deficit. - Legal basis and framework: - MNB membership in the European System of Central Banks and legal independence are granted by the Act on the MNB (Act LVIII of 2001). - The Act prohibits MNB financing of the government fiscal deficit, sets MNB responsibilities regarding management of the single treasury account and other government accounts at the MNB, and regulates profit transfers to the budget. - The MNB has full operational autonomy in setting monetary policy. - Exchange rate policy is a shared responsibility; currently Hungary follows an exchange rate band. ### Public financial institutions (PFIs) - PFIs undertake noncommercial activities on behalf of the government, providing support through preferential-rate loans and guarantees for policy goals. - Examples and activities: - Hungarian Development Bank (MFB): supports infrastructure, housing, agriculture, small and medium size enterprises, and family doctors; issues bonds denominated in foreign currency and lends in domestic currency; government assumes currency risk within a limit set in the ABL. - Hungarian Export-Import Bank (Eximbank): supports exporters via refinancing of credit lines to commercial banks, export prefinancing, and financing agricultural exporters at preferential rates; government guarantees issued if export operation is of national economic interest. - Credit Guarantee Company: provides unconditional payment guarantees to small- and medium-size companies unable to offer collateral under commercial loans. - QFAs undertaken by PFIs are covered by the budget through clear and regulated payment mechanisms. ### Fiscal roles of branches of government - The Constitution assigns powers between the executive, legislative, and judicial branches; parliament has prerogative of approval of the budget and may change the draft budget proposed by the executive without restriction. - Fiscal powers and responsibilities of the executive are specified mainly in the PFA. ### Fiscal management across levels of government - Responsibilities of different levels of government are specified: - Act on Local Self-Government (ALSG) (Act LXV of 1990) specifies areas of expenditure responsibility and the taxes, fees, and charges local governments can impose. - Local governments receive own-source revenue plus substantial grants and transfers of tax revenue from central government, including a specified percentage share of personal income tax as set in the ABL; many grants are formula-based. - Recent actions created uncertainty in local government revenue bases: - Decision in 2005 to abolish the local business tax with effect from 2008 (subsequently reversed in July 2006). - 2006 ABL provision withheld approximately 1.5 percent of the local government share of personal income tax to be released at central government discretion based on public finances and economic growth. - Wages of local government employees largely set by national government—example: very large increases in civil service pay awarded by central government in 2002 significantly affected local government finances. - Legislative limits on local government borrowing: - S.88(2) of the ALSG imposes a limit of 70 percent of “adjusted” own-source revenue. - These limits do not apply to local government public enterprises (such as the BKV). ### Legal and administrative framework for budget management - The PFA is the organic budget law covering budgeting and financial management across “legal” government (state budget sector and local government); detailed provisions for state budget preparation and execution are in the ABL. - Coverage gap: - Certain general government bodies are not part of either the state budget sector or legal government, so sectoral coverage is not comprehensive. - Expenditure appropriations: - Several annual budget appropriations are estimates rather than limits; some agencies may spend more than the appropriated amount without parliament increasing the appropriation. - A PFA requirement obliges government to submit an amendment to the Annual Budget to parliament if excess expenditure will increase the aggregate budget deficit by 2.5 percent or more. - Additional requirement exists that if the variation exceeds 5 percent, a supplementary budget bill be submitted to parliament. - Concerns and recommendations: - The ability to exceed appropriations has contributed to fiscal indiscipline and may have undermined fiscal adjustment efforts, especially since it applies to a wide range of expenditure programs, including non-mandatory ones. - Recommendation: eliminate provisions permitting appropriation overruns with respect to non-mandatory expenditure; allow flexibility only for truly mandatory programs with entitlements clearly laid down in legislation. - Recommendation: specify permitted overruns with reference to total spending on the relevant programs (rather than aggregate expenditure) and subject forecasts to careful scrutiny for realism. - When fiscal adjustment is a priority, temporary suspension of overrun provisions (through supplementary legislation if necessary) may be justified until policy credibility is restored. - Any expenditure overrun that increases the fiscal deficit should be approved by the legislature. ### Coordination and management of budgetary and extrabudgetary activities - Social security funds (Pension Fund and Health Care Fund) and “extrabudgetary funds” defined by the PFA are part of the state budget sector; their expenditure is appropriated by parliament and their funds are part of the Treasury Single Account (TSA). - Central government units outside legal government (as identified in Box 1) are not covered by the budget, though their finances are generally well coordinated with the budget. - Improvement since 2001 ROSC: - General government expenditure financed from APV revenue must now be approved by parliament in the budget (though there is no requirement for parliamentary approval of the company’s operating and related expenditure), reducing prior scope for substantial discretionary expenditure from APV sources. ### Tax policy and administration framework - Legislative basis: - Rules of Taxation Act (Act XCII of 2003) outlines rights and obligations of tax authorities and taxpayers. - Other key tax legislation: Value-Added Tax Act (Act LXXIV of 1992), Personal Income Tax Act (Act CXVII of 1995), Corporate and Dividend Tax Act (Act LXXXI of 1996). - Tax expenditures: - Tax expenditures are large; among the largest are tax credits for wage earners and family tax credits. - Eligibility for family tax credits was tightened in late 2006, reducing associated tax expenditures. - Tax administration (APEH): - Tax and Financial Control Administration (APEH) organized by function and has a special tax office for large taxpayers. - APEH collects major taxes and social security and health contributions. - APEH is regulated by a legal framework granting tax officers a full range of powers and providing taxpayer protections. - APEH service channels: face-to-face consultations, headquarters call center, website; services include answers on tax liabilities and account status, publications and guides, electronic filing, and downloadable paper forms. - Need for increased administrative powers to deal more effectively with late tax returns and late payment of tax liabilities. - Taxpayer rights: - Right of appeal against APEH decisions, both within the tax administration and ultimately to the court. - The Rules of Taxation Act provides authority for legal appeals and remedies. - Taxpayers entitled to receive advance tax rulings, which are binding on APEH. ### Public service ethics and anticorruption - The Act on Legal Status of Public Servants (Act XXXVI of 2001) includes provisions related to conflict of interest, declaration of property, limitations on political and private sector activity, oath of office, and protection of state and official secrets. - Gap: these legal provisions do not amount to a robust code of conduct covering training, promotion, compliance monitoring, and protection for whistleblowers. - Recommendation: establish a well-defined code of conduct to aid in fighting corruption. ### Open budget preparation, execution, and reporting - Annual budget process: - Calendar year basis; well-established timetable. Key steps include base budget drafting in January and submission to parliament by late September for approval by end-December. - Multiple fiscal indicators referenced in budget documents: - Indicators include overall balance of the state budget sector, legal government, ESA95 general government, and budget balance based on the Maastricht criteria (ESA95 measure adjusted for debt swaps). - An annex explains relationships between concepts and provides a summary table. - Multiplicity of indicators complicates public debate on fiscal policy objectives. - Monitoring and coverage limitations: - Within-year monitoring is essentially limited to the state budget sector on a cash basis, which does not always indicate broader fiscal developments per ESA95. - The MoF does not report on the overall fiscal position of the public sector, despite operating losses of some public enterprises being significant. - The MNB constructs an indicator of the overall balance of general government consolidated with key QFAs (e.g., operations of MAV, the BKV, and the MFB), other contingent liabilities, and PPPs to provide broader coverage of fiscal operations and their demand impact. ### Box 3 — Main steps in the budget preparation process (calendar year basis) - January–February: MoF begins drafting the base budget. - March: Meetings between MoF and Administrative Secretaries of State to finalize budget guidelines. - Mid–April: MoF submits guidelines to Council of Ministers. - Mid–May: Council of Ministers approves guidelines. - June: MoF issues budget circular for planning and budgeting chapters. - July–August: Heads of agencies submit proposed budgets for their chapters; MoF conducts initial review. - End of August: MoF submits draft budget bill to Council of Ministers. - September: Council of Ministers reviews and finalizes draft budget bill; budget bill submitted to parliament at end of month. - October–November: First Reading of bill, with parliamentary debate. - End of November: Parliamentary decisions related to definition of total amounts of the chapters and the deficit (surplus) amount. - December: Detailed parliamentary debate with proposed amendments to specific chapters; Second reading and final vote on Budget Bill and publication. *Source: _cr0711 - 6. Government regulation of the private sector is complex, although there have been improvements in some areas_* ### 22. Budget forecasts and underlying macroeconomic assumptions are clearly ### 22. Budget forecasts and underlying macroeconomic assumptions are clearly ### Macroeconomic forecasts and medium-term planning - The macroeconomic forecasts underpinning the budget are prepared and published by the MoF, although the underlying forecasting models are not publicly available. - Hungary’s stated medium-term fiscal policy objectives are to comply with Maastricht fiscal rules on the overall balance of the general government and gross public debt. - To deliver on these medium-term objectives, the government has three main economic planning systems: the EU Convergence Program, the National Development Plan, and the annual budget. - Critical problems identified: - Lack of sufficient detail or adequate quantification of the underlying policies to support the achievement of medium-term objectives. - The three planning systems are for the most part developed independently, and the budget documents only reference Convergence Program objectives in broad terms without explaining the relationship between medium-term objectives and annual budget targets. - Budgetary resource envelopes do not bear a close relationship with the public investment strategy of the National Development Plan. - A medium–term budget framework capable of supporting the achievement of such medium-term fiscal targets has yet to be developed. - Fiscal sustainability analysis in the budget documents is limited to projections of pension expenditure (in an appendix). Estimates of other age-related spending are not presented. - The Convergence Program discusses debt projections consistent with proposed fiscal targets and the impact of some macroeconomic variables on debt dynamics and fiscal outcomes, but a full debt sustainability analysis is not prepared. ### Costing of initiatives and fiscal risks - Estimates of the cost of new initiatives and of ongoing government policies are not clearly distinguished in the budget documents; there is some discussion of large expenditure programs and tax policy intentions. - The budget documents contain little information on, or discussion of, fiscal risks other than government guarantees. - An appendix provides estimates of debt guarantees expected to be called in the budget year; the methodology is not open to external scrutiny. - No data or discussion of risks related to macroeconomic variables, QFAs or PPPs. - The Convergence Program presents estimates of the impact of the economic cycle on the overall fiscal balance, but there is no sensitivity analysis of the fiscal position, expenditure, and revenue to changes in key economic variables in the budget. - Risk analysis of the fiscal implications of QFAs is not carried out, despite risks from QFAs having been and remaining significant. - The budget documents contain a summary table of PPP operations, their total expected cost, and the estimated impact of associated availability fees on the budget in the coming three years. - The lack of a clear accounting and institutional framework for PPPs implies important fiscal risks that are not transparently disclosed. - The budget documents do not include information on QFAs, and contain quite limited information on contingent liabilities and tax expenditures. The ABL proposal and the Final Report on Fulfillment of the Budget contain some information on exemptions under personal and corporate income tax as far as quantified by authorities. ### Clarity of control of budget execution and financial management - Accounting and internal control procedures are in place: - Government has a standardized accounting system recording both cash transactions and many accrual transactions (such as depreciation and receivables) applying to all units of legal government. - Government is working to improve the accounting system to bring it into full conformance with ESA95 (full accrual basis). - All state budget sector units are part of the TSA; local government receives transfer payments from central government through the TSA. - The SAO has authority to review and report on internal control and accounting procedures. - Coordination of financial management practices requires further improvement: - The Hungarian State Treasury (HST) prepares three month cash plans, but cash planning could be improved by better forward expenditure plans from line agencies. - Financial management practices related to government debt are set out in the PFA; State Debt Management Agency (AKK) is responsible for financing and debt management and produces an Annual Report on Debt Management. - Internal audit could be more effective: - Government decree 193/2003 (XI.26), subsequently amended by decree 70/2004 (IV.15), establishes internal audit system for budget units and functional independence of internal auditors. - Further work needed on accountability and governance arrangements, risk-based internal audit planning and implementation, development of a more professional cadre of internal auditors, and establishment of effective internal audit committees. - The Government Control Office (established by Government Decree 70/2004 (IV.15)) oversees and supports internal audit and audits the use of EU funds. - Procurement rules and practices: - Managed by the Public Procurement Office; legislative basis in the Act on Public Procurement CXXI of 2003. - The “Glass Pockets” anti-corruption initiative (launched mid-2003) introduced transparency requirements for contracts involving public funds or property with a value of 5 million HUF (approximately US$27,000). - Hungarian procurement rules comply with EU public procurement directives and the WTO Agreement on Government Procurement. - Required rules and practices apply only to legal government sector as defined by the PFA; considerable uncertainty exists regarding public procurement rules for PPPs. - Civil service employment procedures: - Chapter III of the Act Legal Status of Public Servants (Act XXIII of 2001) regulates employment. - Open competitive recruitment processes are not the norm; recruitment and promotion procedures are complex, nonstandardized, and discretionary. ### Tax administration controls and independence - Internal monitoring and control mechanisms for tax administration require improvement: - Department of Internal Audit and Legal Supervision of the APEH plays an internal audit role; there is an internal code of conduct for tax collection officials, but its effectiveness in limiting corruption is unclear. - National tax administration legal protection: - APEH is supervised by the Minister of Finance; the President of APEH is appointed and may be dismissed by the minister. - No explicit legislative ban on the Minister of Finance intervening in, or directing, the APEH in determination of individual taxpayer liabilities. - Rules of Taxation Act (Act XCII of 2003) include powers of the Minister of Finance such as ordering tax audits (Section 89) and requesting directors of tax authorities to report and provide taxpayer case information (Section 11). ### Accounting, fiscal reporting, and audit timeliness - Accounting system and within-year reporting: - The accounting system can produce accurate within-year reports on state budget execution. - Monthly budget execution reports are published on the MoF website by the end of the following month; although labelled “general government,” they cover the state budget sector. - Monthly reports are derived from the HST current account management systems rather than government agency accounts. - Annual accounts of legal government units are drawn from units’ accounts half-yearly. - Methodological differences mean within-year ESA95 reports cannot be compiled directly from accounting system data; legal government units compile a quarterly balance sheet report for the Hungarian ESA95 report. - Quarterly ESA95 reports are compiled for internal use and reporting to Eurostat, but report quality needs further improvement. - Fiscal reporting covers general government: - General government fiscal reports are published annually; consolidation quality has substantially improved but further work remains. - Legislature and reporting: - The legislature does not undertake a mid-year budget review and is not presented with in-year budget execution reports (though such reports are made public). - Audited final accounts: - Audited final accounts are available within twelve months of the end of the fiscal year. - The PFA requires final accounts on the execution of the central government budget be provided to parliament within eight months of the conclusion of the budget year, and they must be submitted to the SAO two months prior to that. - SAO’s responsibility reinforced in the State Audit Act (Act XXXVIII of 1989). ### Results-oriented budgeting and transparency - Objectives and expected results from government activities are discussed only in general terms in budget documents. - Budget documents presented to parliament say little about policy or program objectives; no performance information (performance measures or program evaluation results) is made available. - Little progress has been made toward performance budgeting since the 2001 ROSC recommendation. ### Public availability and coverage of fiscal information - Fiscal information is fairly comprehensive and readily available to the public, with a clear commitment to provide information at scheduled times. - Budget execution reports covering the state budget sector are made public promptly on a monthly and annual basis. - Annual reports on general government fiscal outcomes are available on both an ESA95 and GFS basis. - Coverage and content of budget documents: - Annual budget bill accompanied by appendices providing details of appropriated expenditure and revenue, plus information such as budgeted transfers from privatization receipts. - General explanatory document contains data and narrative on macroeconomic context, fiscal policy objectives and targets, deficit financing, projected debt, and projected deficit on an ESA95 and Maastricht basis. - Appendices provide information on expenditures of legal government classified by function and economic type, financial transactions with the EU, macroeconomic projections, and estimates of expenditure, revenue, and the budget balance for the budget year for legal government and its subsectors. - The budget documents provide deficit and debt data for the entire general government sector only on an ESA95 and Maastricht basis. - Defense expenditure is comprehensively reported. - The budget documents—including appendices and general explanatory documents—are available only in Hungarian. - EU funds and cofinancing: - Budget documents report on all EU funds which are (i) distributed by the Hungarian government or (ii) require Hungarian cofinancing. - Since 2004 the budget has contained multiyear appropriations for commitments to future cofinancing of known EU projects (S.54 of 2006 ABL). ### Past and forecast fiscal data; budget horizon - Budget documents disclose main fiscal aggregates for two years prior to the budget year. - Budget documents provide original appropriations rather than estimated outturns for the year prior to the budget year. - No information on projected expenditure, revenue or financing is presented for the years beyond the budget year. - The Convergence Programme of September 2006 anticipates that starting with the 2007 budget, the ABL will define expenditure appropriations for ministries and certain other agencies in nominal terms for three years ahead. ### Publication of debt and financial asset data - Information on gross public debt: - Monthly, quarterly, and annual debt reports are made public by AKK; reports cover only state budget sector debt and do not include local government debt. - Reports include foreign and domestic currency debt, breakdowns by instrument and maturity, breakdown of domestic currency debt by holder categories, breakdown of foreign currency debt by currency and by fixed vs. floating interest rate, and some information on debt swaps. - Nominal and market values are provided; data are timely and of good quality. - Annual and quarterly data on debt and other liabilities of general government (central and local government consolidated) are published by the MNB as part of a general government balance sheet in the Financial Accounts of Hungary. - AKK and MNB data are not reconciled. - Information on government financial assets: - The MNB publishes full data on the financial assets (and liabilities) of general government in its Financial Accounts of Hungary based on GFS valuation principles. - Final accounts presented to parliament after the budget year include balance sheets for subsectors of legal government, although these are not consolidated. ### Commitment to timely publication - Hungary subscribes to the IMF’s Special Data Dissemination Standard (SDDS) and produces advance release calendars. - Monthly and annual general government fiscal data is published on the ministry website within three weeks of the end of the relevant time period, and advance release calendars for this data are generally adhered to. - Reports contain both statistics and analysis of major developments. - While timing of provision of annual budget execution reports to parliament is laid down in the PFA, there is no such statutory requirement for within-year reporting. *Source: _cr0711 - 22. Budget forecasts and underlying macroeconomic assumptions are clearly* ### 46. Data on budget outcomes on a cash basis are mostly reliable and the variance ### 46. Data on budget outcomes on a cash basis are mostly reliable and the variance between budgeted and actual outturns for the main fiscal aggregates is disclosed to the public ### Data reliability and variance between budget and actual outturns - Data on budget outcomes on a cash basis are mostly reliable and the variance between budgeted and actual outturns for the main fiscal aggregates is disclosed to the public. - Variance between budget and actual outturns has been considerable because of the unreliability of budget estimates of both expenditure and revenue. - Average percentage differences (average of the absolute values) over 2002, 2003, and 2004: - Between budgeted and actual primary expenditure: 12 percent. - Between budgeted and actual tax revenue: 12 percent. - Deviations between budget estimates and outcomes are explained in the final accounts. ### Key budget figures (Box 4: Revenue and Expenditure of the State Budget Sector, 2002–04, in billions of HUF) - 2002 - Primary expenditure: Original 3,842; Actual 5,098 - Interest payments: Original 669; Actual 660 - Capital expenditure: Original 770; Actual 1265 - Nontax revenue: Original 460; Actual 351 - Tax revenue: Original 4,070; Actual 4,357 - 2003 - Primary expenditure: Original 4,595; Actual 4,868 - Interest payments: Original 657; Actual 728 - Capital expenditure: Original 761; Actual 767 - Nontax revenue: Original 352; Actual 387 - Tax revenue: Original 4,740; Actual 4,938 - 2004 - Primary expenditure: Original 5,379; Actual 5,362 - Interest payments: Original 690; Actual 801 - Capital expenditure: Original 974; Actual 860 - Nontax revenue: Original 429; Actual 524 - Tax revenue: Original 5,479; Actual 4,147 - Source: Hungarian authorities. ### Accounting policy, reconciliation, and reporting - Accounting policy is generally well defined but no formal statements of accounting policy are included in the budget documents and final accounts. - Detailed accounting guidelines are specified in the Act on Accounting and Government Decree 249/2000. - The MoF has produced an accounting manual for compiling the annual accounts of units of legal government. - The process of accounts reconciliation is largely effective; efforts to improve consolidation and reconciliation of the deficit and financing have achieved almost full reconciliation, with only a small remaining discrepancy between above-the-line and below-the-line figures. ### Independent external oversight - The Supreme Audit Office (SAO) is independent of the executive branch, established by the Constitution as an organ of parliament. - SAO mandate covers all general government activities, other than those of local government, together with some activities of the broader public sector; it audits the use of grants and transfers from central government to local government and local government financial management systems under the ALSG. - The Constitution and the State Audit Act: - Provide that the chairman and two vice-chairmen of the SAO are elected for 12-years by parliament and may only be removed for professional misconduct or conflict of interest. - Stipulate that the draft annual budget of the SAO is formulated by the SAO itself and not by executive government. - May only be amended by a two-thirds majority of parliament. - With limited exceptions involving state secrets, all SAO reports are made public; ministers and chief executives of audited bodies may respond formally within eight working days. - The SAO has strong audit capacity supported by well qualified and trained staff; current capacity is assessed as adequate for its responsibilities. - There is no parliamentary public accounts committee charged with review of SAO reports; the Budget Committee’s role is confined to review of the draft budget and other legislation with financial impacts. - No significant external scrutiny of macroeconomic models and assumptions is carried out; the MoF’s model used for macroeconomic forecasts underpinning the budget is not publicly available and no detailed description exists at present, though information about some key assumptions is available. - The Act on Statistics gives the Hungarian Central Statistical Office (CSO) technical independence; the president and deputy president of the CSO are appointed by the prime minister for six years with possibility of renewal for a second term. - Hungary subscribes to the Special Data Dissemination Standards (SDDS) and meets the timetable for providing data on central administration and general government operations. ### IMF staff commentary — progress and remaining shortcomings - Notable improvements since the 2001 fiscal transparency ROSC: - A wider range of fiscal activities and QFAs have been brought under the scope of the annual state budget and PFA, and fiscal data are reported on a general government basis consistent with ESA95 and GFSM 2001. - Internal and external audit has been strengthened, procurement policy tightened, and the “Glass Pockets” program has increased accountability for the use of public funds and property. - Remaining shortcomings to be addressed: - Coverage of the budget. - Fiscal reporting. - The medium-term fiscal framework. - Debt sustainability analysis. - Fiscal risk analysis. - Independent scrutiny of macroeconomic models and assumptions. - Budget outcomes and performance. - Availability in English of more Hungarian budget documentation on the MoF website would improve transparency vis-à-vis international markets. ### Coverage of the budget and fiscal indicators — issues highlighted - Hungary’s medium-term fiscal policy objectives under the Convergence Program are specified in terms of fiscal outcomes for the entire general government (consistent with ESA95); internal fiscal debate should have the same sectoral focus. - Budget documents and much of the parliamentary debate center on state budget sector and legal government outcomes; some central government units remain outside the state budget sector and legal government as defined by the PFA. - Recommendation: bring bodies such as NA and APV within budget coverage and ensure the Convergence Program discussed and approved by parliament provides the framework for the annual state budget so that all parts of general government are factored into headline fiscal indicators. ### Classification and accounting of specific entities and transactions - The government’s decision to classify AAK in the general government sector from 2006 is appropriate because AAK collected vignette receipts on behalf of the government and the revenue is non-market in nature under ESA95. - The decision to recognize capital expenditure on new motorways previously planned by AAK is welcomed; Hungarian civil code assigns ownership of all roads to the state, implying new motorways are not AAK assets. - Transactions of a “creative accounting” nature can hinder addressing fiscal challenges. ### Fiscal reporting improvements recommended - Fiscal indicators in budget documents and financial statements should be aligned with ESA95 in sectoral coverage and ESA95 accounting principles and practices. - Within-year reports are currently limited to monthly cash position reports of the state budget sector; recommendation to accelerate moves to quarterly reporting on an ESA95 basis. - Such quarterly reports should be public and submitted to parliament. - Reports should contain an analysis of deviations of fiscal aggregates from their planned path to help determine whether policy correction is needed. - Debt reporting by AKK should be extended from the state budget sector to general government. ### Medium-term fiscal framework and expenditure targeting - The Convergence Program specifies fiscal policy objectives through 2009 with the principle objectives being reduction of the overall deficit and gross debt of general government to Maastricht Treaty levels. - Previous Convergence Programs were judged unrealistic due to lack of consistency with state budget and favorable accounting treatment of problematic transactions (e.g., military fighter leases and PPPs). - Medium-term framework should be supported by careful debt sustainability analysis, realistic adjustment scenarios, a detailed macroeconomic framework, and quantification of adjustment policies; models used should be publicly available. - Recommendation: government adopt a medium-term budget framework consistent with the Convergence Program; integrate National Development Plan, Convergence Program, and annual state budget. - Early steps for medium-term planning include presenting three-year appropriations for certain expenditures in preparation for the 2007 state budget. - Given need for expenditure-side adjustment, a medium-term budget framework could take the form of multiyear expenditure targets to anchor adjustment while allowing automatic stabilizers to operate on the revenue side. ### Box 5 summary — design of expenditure targeting frameworks (key points) - Target broad-based expenditure aggregates to reduce risk of creative accounting; some exclusions may be justified (e.g., interest bill, counter-cyclical items, priority/high quality spending) but should be balanced with risks of excluding broad categories. - Some disaggregation of spending ceilings can be useful but should not impose excessive rigidity; lower-than-expected expenditure should generally be saved. - Setting multiyear targets has advantages (explicit medium-term goals, consensus building) and disadvantages (reduced flexibility); rolling targets or legislature-fixed targets with limited contingency provisions are options. - Realistic macroeconomic assumptions strengthen transparency; overly cautious scenarios can obscure fiscal goals and induce lower commitments by line ministries. - Nominal targets are easier to monitor and can support countercyclical policy, but can lead to disruptive cuts in real spending when inflation is high. - Cash and accrual based targets can be complementary; accrual measures are generally superior for planning, while cash-based figures aid within-year monitoring. *Source: IMF staff report text (ROSC fiscal transparency section).* ### 63. There is a need to do more longer-term fiscal analysis, most notably to develop a ### _cr0711 - 63. There is a need to do more longer-term fiscal analysis, most notably to develop a fuller understanding of the future fiscal implications of the aging population. ### Longer-term fiscal analysis - Need to develop a fuller understanding of the future fiscal implications of the aging population to encourage adjustment measures addressing immediate, medium-term, and longer-term fiscal pressures. - Measures that contribute to a fundamental social protection and health care reform are identified as falling into this category. ### Fiscal risk analysis - Hungary currently reports guarantees transparently; the Convergence Program contains some analysis of risk surrounding macroeconomic projections. - A supplementary report to the budget should broaden coverage to identify and, if possible, quantify key sources of fiscal risk so fiscal policy can be formulated to ensure manageable risk exposure. - Given the rapidly growing use of PPPs in Hungary, special attention should be paid to fiscal risks arising from PPPs. - Fiscal risk analysis should: - Look beyond guarantees to other factors affecting fiscal outcomes. - Account for uncertainties surrounding short-term forecasts and medium-term projections. - Pay attention to the range of possible outcomes to counter optimism bias and highlight downside risks. - Recognize that debt sustainability analysis is extremely sensitive to key assumptions and that risks are correlated across assumptions. ### Independent scrutiny - Internal scrutiny: - The SAO has a mandate to report on the “basis for the budget” and can comment on whether the stance of the budget is appropriate, expenditure proposals are reasonable, and revenue forecasts are realistic. - The SAO’s focus is mainly on revenue forecasting; it has consistently warned about optimism bias, but fiscal targets are routinely missed. - External scrutiny: - Regular Fund, OECD, and EU surveillance, with EU surveillance stepped up in the context of the Convergence Program. - The MNB has publicly commented on fiscal policy in its Inflation Report, expressing concerns about the government’s ability to meet Convergence Program fiscal targets. - The role of fiscal policy watchdog should not be part of the mandate of an independent central bank; preferable to have other institutions perform this role. - Options to increase internal scrutiny: - Strengthen the mandate of the SAO to require judgments on fiscal policies, including clarity of fiscal policy and consistency of the budget with announced fiscal policy; require government responses to SAO comments and reporting of outstanding issues to parliament. - Caveats: fiscal policy analysis is not usually a core competence of supreme audit bodies; SAO skill base is accounting-related and would need resources to strengthen macroeconomic and microeconomic expertise; risk of weakening core functions and difficulty establishing credibility on policy matters. - Alternative: set up an expert advisory council with a mandate to provide an independent view on all or selected aspects of fiscal policy. ### Budget outcomes and performance (performance budgeting recommendations) - Move toward performance budgeting by taking steps to: - Clearly specify the objectives of public expenditure in terms of intended outcomes; - Classify expenditure in terms of objectives, replacing allocations based on input categories by program allocations; - Begin to develop performance indicators, program evaluation, and other methods of obtaining information about program performance; - Modify the budget process to give greater attention to choices about the best allocation of limited resources between competing purposes; - Strengthen the organizational structures and capacity of government ministries to implement the proposed performance management framework. ### Summary of key findings from past fiscal transparency assessments (selected observations and recommendations) - 2001 Full ROSC — Overview: - Significant progress in increasing the transparency and accountability of government. - The PFA conforms to EU requirements; recent reforms provided a modern and well-functioning budget process and comprehensive coverage couched in a medium-term economic framework. - Effective internal and independent external audit controls; a number of extrabudgetary funds reduced significantly; comprehensive fiscal data reported. - 2001 Full ROSC — Areas for improvement: - Central government should present a consolidated picture including activities of the APV. - Consider restructuring between the budget and APV to bring APV fiscal activities fully into the central government budget with the same treasury and internal audit controls. - Operations of the NA and “nonprofit” institutions that conduct essentially fiscal activities should be reflected in the central government budget and reports. - Ensure all government spending is authorized by parliament (budget or supplementary budget). - Ensure stricter adherence to public procurement rules at all levels of government. - Prepare comprehensive reports on QFAs, on the financial assets of the government, and on tax expenditures. - Consider moving towards performance or output-oriented budgeting and developing capacity for performance or value-for-money audits. - May 2002 ROSC Update — Overview and commentary: - Significant fiscal activities still conducted outside MoF purview (APV and MFB). In 2001, spending outside government budget increased by 1.5 percent of GDP (bulk by the NA, subsidiary of MFB). - PFA amended late 2001 to include detailed reporting requirements for all economic units engaged in fiscal activities. - Partial reporting of QFAs; MoF does not prepare regular, comprehensive QFA reports. - New reporting system on value of state financial assets under preparation; quarterly accounts on valuation and quarterly stock data intended. - Fiscal transparency still falls short of international best practice; compliance with PFA amendments seems uneven. - First priority: ensure all off-budget spending is reported timely and comprehensively to MoF and reflected in public reports and final reports to parliament. - April 2003 ROSC Update — Overview and commentary: - Accounts of the APV consolidated with general government on ESA95 basis, though APV remains outside central government budget; APV revenue and expenditure negligible share of consolidated general government on ESA95 basis. - Government can no longer use APV privatization reserves for subsidizing government activities, injecting capital in state-owned companies, or undertaking other QFAs. - All QFAs of MFB eliminated; central government purchased three MFB subsidiaries in December 2002 (one-off increase to 2002 central government expenditure equivalent to 2.1 percent of GDP). - Frequency and timeliness of data improved; consolidation reduced some discrepancies between fiscal and monetary accounts though considerable discrepancy remains. - Hungary’s 2002 Pre-accession Economic Program (PEP) included an analysis of fiscal risks. - Revaluation of state financial assets to market prices began January 2002 but progress slow. - Government began compiling fiscal data in line with accrual-based ESA95; made public April 2002 with explanations of differences from national data; work underway to provide regular quarterly fiscal data to the Commission. - Government abandoned budget within a medium-term framework in 2003 and reverted to annual budget basis. - Government began developing a rolling three-year fiscal program covering 2004–06, framework expected by September 2003. - Recommendations: bring all fiscal activities of APV within central government budget subject to same controls; continue efforts to bring nonprofit institutions and funds performing public services into budget or privatize/eliminate and outsource services; quantify and report other QFAs and tax expenditures; move toward performance-based budgeting; address remaining data quality issues and publish consolidated general government accounts more frequently; more timely publication by economic and functional classifications. - April 2004 ROSC Update — Observations and commentary: - MoF and Prime Minister’s Office surveyed nonprofit institutions performing government functions; those relying mainly on budget support to be absorbed by central government (work in progress). - From 2004, use of privatization receipts limited to financing central budget infrastructure projects approved by parliament. - Some QFAs eliminated in 2003 when central government purchased three MFB subsidiaries. - Periodicity and timeliness of fiscal statistics meet or exceed IMF SDDS requirements. - 2003 amendment to PFA required government to publish, beginning with fiscal accounts of 2002, detailed explanation of differences between national accounts and ESA95 accounts reported to Eurostat. - Line ministries required by end-September 2004 to formulate performance indicators to be monitored. - Some reversals: government did not proceed as planned with rolling three-year fiscal program; 2002 PFA amendment permits additional spending without supplementary budget appropriations and parliamentary approval if deficit does not exceed budgeted amount by more than 5 percent of total expenditure—allowed additional expenditure and a higher deficit in 2004. - Progress made to strengthen audit and financial control and internal audit procedures; new government decree strengthened internal audit, requiring financial, system-based and performance audits in line with international standards. - Recommendations reiterated: discontinue practice allowing additional spending without supplementary appropriations and parliamentary approval; discontinue quasi-fiscal MFB lending of a quasi-fiscal nature; quantify and report tax expenditures; address remaining data quality issues. ### A summary assessment of practice (selected points) - Overall: Hungary complies with the Code of Good Practices on Fiscal Transparency in many respects and has improved compliance in recent years; important areas require further improvement, notably discontinuation of transactions that improve apparent but not actual fiscal position. - Clarity of roles and responsibilities: - General government largely consistent with ESA95 and GFS principles; significant improvements since previous ROSC. - Separation between monetary and fiscal authorities is clear; MNB has high degree of independence. - Public availability of information: - Budget documents and annual budget execution reports cover most general government fiscal activities and report consolidated fiscal position. - Budget documents disclose main aggregates for two prior years but do not present projections of expenditure, revenue or financing for coming years. - Budget documents contain limited information on quasi-fiscal activities and contingent liabilities and tax expenditures. - Open budget preparation, execution, and reporting: - Medium-term fiscal policy objectives are clearly stated but link to concrete fiscal policy measures in annual budgets is unclear. - No fiscal rules articulated. - Budget documents provide little discussion of fiscal risks other than guarantees. - Objectives and expected results from government activities are discussed only in general terms; no performance information presented to the legislature. - Assurances of integrity: - Budget estimates are not a reliable indicator of actual budget outcome. - External audit is independent and provides timely reports to legislature and public on financial integrity. - No significant external scrutiny of macroeconomic models and assumptions is carried out. *Source: _cr0711 - 63. There is a need to do more longer-term fiscal analysis, most notably to develop a* ### Appendix III. Public Availability of Information—A Summary ### Appendix III. Public Availability of Information—A Summary ### Overview - Summary table covers budget and fiscal report elements for the central government (CG) and general government, indicating whether each element is included in budget/report documents and whether it is available to the public. - Table entries include paragraph references (Para ref.) and code references (Code ref.). ### Key findings by report element - 1. Central government (CG) budget estimates. - Included in budget/report documents: Yes, following legal government definition (Box 1). - Available to the public: Yes. Published/press/internet. - Para ref.: 39 - Code ref.: 2.1.1 - 2. CG Defense Expenditures - Included in budget/report documents: Yes - Available to the public: Yes. - Para ref.: 39 - Code ref.: 2.1.1 - 3. CG EBFs - Included in budget/report documents: Partially. Including Social Security Funds and other “Extrabudgetary Funds” defined in the PFA. But a number of central government bodies outside legal government which are true EBFs are not covered in the budget documents (Box 1). - Available to the public: Yes. Published/press/internet. - Para ref.: 39 and 3 - Code ref.: 2.1.1 - 4. CG Budget outturns - Included in budget/report documents: Yes. Budget documents include main aggregates for the state budget sector for: the fiscal outturn 2 years prior to the budget year; and previous year budget appropriation. - Available to the public: Yes. Published/press/internet. - Para ref.: 41 - Code ref.: 2.1.2 - 5. CG Budget forecasts - Included in budget/report documents: No - Para ref.: 41 - Code ref.: 2.1.2 - 6. CG Contingent liabilities - Included in budget/report documents: Annex on debt guarantees of debt budget sector, with probable cost estimate, and appropriation in the budget. No other contingent liabilities reported. - Available to the public: Yes. Detailed reporting on guarantees. Published/press/internet. - Para ref.: 42 - Code ref.: 2.1.3 - 7. CG Tax Expenditures - Included in budget/report documents: Some information. - Available to the public: Some information. - Para ref.: 42 - Code ref.: 2.1.3 - 8. CG QFAs - Included in budget/report documents: No - Available to the public: No - Para ref.: 42 - Code ref.: 2.1.3 - 9. Macroeconomic assumptions - Included in budget/report documents: Yes. Annex to the budget. - Available to the public: Yes - Para ref.: 22 - Code ref.: 3.1.3 - 10. Analysis of fiscal risks/sensitivity analysis - Included in budget/report documents: Partial. Annex on debt guarantees of state budget sector (see above). No other risk analysis is performed. - Available to the public: Yes - Para ref.: 25 and 41 - Code ref.: 3.1.5 - 11. CG Financial Assets - Included in budget/report documents: Yes. Information in final accounts and in financial accounts published by MNB. - Available to the public: Yes - Para ref.: 44 - Code ref.: 2.1.4 - 12. Sustainability Analysis - Included in budget/report documents: Partial. Annex on medium term pension expenditures. - Available to the public: Yes - Para ref.: 23 - Code ref.: 3.1.1 - 13. General government budget estimates - Included in budget/report documents: Partial. Annual estimates of main fiscal aggregates of legal government (Box 1). Only overall balance on general government under ESA95 (no detail). No medium-term estimates in budget documents, but available in Convergence Program. No QFAs; tax expenditures; contingent liabilities (except state budget sector guarantees). - Available to the public: Yes - Para ref.: 38 - Code ref.: 2.1.5 - 14. CG Monthly reports on fiscal outturn - Included in budget/report documents: Yes. Published three weeks after the end of the month. - Available to the public: Yes. Published/press/internet. - Para ref.: 33, 45. - Code ref.: 3.4.1 - 15. General government quarterly reports on fiscal outturn - Included in budget/report documents: Submitted to the EU but not published. - Available to the public: No - Para ref.: 33 - Code ref.: 3.4.1 - 16. CG Final Accounts - Included in budget/report documents: Partially. Final accounts of legal government, audited by SAO, go to parliament within eight months after year-end. - Available to the public: Yes - Para ref.: 36 - Code ref.: 3.4.2 - 17. Consolidated general government Final Accounts - Included in budget/report documents: No. - Available to the public: Yes/internet. - Para ref.: 38 - Code ref.: 3.4.2 *Source: Appendix III. Public Availability of Information—A Summary* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr0711.pdf_