Economic and Public Finances

  • Sándor Kopátsy

Hungarian Compass Between East and West

Hungarian Compass Between East and West

We, Hungarians, have been caught between East and West several times throughout our history and we could also say that we have had to manoeuvre continuously in this situation for 1200 years. Today, we are witnessing the search for a way forward in the European Union and unprecedented economic success spearheaded by China in the East, while in the past 50 years greater social and economic changes have taken place than in the preceding 5000 years. It is in this transforming world that we must find points of orientation and succeed by relying on Hungarian virtues and using a good compass.

Journal of Economic Literature (JEL) code: A1, B0, G0, N3
Keywords: Far East, overpopulation, crisis, China, Hungary, European Union

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  • Csaba Lentner

Scientific Taxonomy of Hungarian Public Finances After 2010

Scientific Taxonomy of Hungarian Public Finances After 2010

For four decades after World War II (between 1947 and the end of the 1980s), a Soviet-type planned economy introduced under external pressure prevailed in Hungary. When this line weakened, the then “trendy” neoliberal market economy system gained ground. Although the Hungarian planned economy was characterized by a practice saturated with market elements, intended to increase the financial interests of domestic residents, still control by external fundamentals, deregulation and chopping government functions became the general market practice. However, neither the planned economy modelled on the Soviet system, nor the neoliberal market economy model built on the principles of the Washington Consensus suit the Hungarian conditions. The Crisis of the neoliberal model had become obvious by the end of the 2000s. In contrast to this, however, after 2010, a proactive economy influencing state model came to the forefront during the practice of recovery from the crisis.

Recalling the historical events preceding the changes, following the new international trends after 2007–2008, and the successes achieved using unconventional instruments after the 2010 government change, all give a reason for the existence of Hungarian public finance reforms. With institutional thinking coming to the limelight and by demonstration of the new type of instruments, the author scientifically justifies the unconventional methods used in Hungarian public finances. In the author’s opinion, after the 2007–2008 crisis, all over the world evidences suggest an increasing shift in thinking towards the institutional framework and the need of state influence, control and regulation of the economy. There is a strong demand for addressing informational asymmetries, increasing government control and improving the conditions of competition by means available for governments. This analysis provides a scientific outline of this taxonomy.

Journal of Economic Literature (JEL) code: A2, B1, E12, E5, G01, H6, N10, P10, P20
Keywords: political economy, fiscal policy, monetary policy, planned economy, subprime crisis, new public finances system

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  • Árpád Kovács

Rule-Based Budgeting: The Road to Budget Stability.
The Hungarian Solution

Rule-Based Budgeting: The Road to Budget Stability. The Hungarian Solution

Starting from the macro-economic processes of public finance, this article examines the road to reaching financial stability and sustainable economic growth. It outlines the role played by rule-based budgeting in this process. It introduces the regulatory and institutional solutions and explains how, as a logical consequence of being part of a framework, this service can become a useful aspect of financial policy by implementing the respective regulations of the system and of annual budgetary practice. It reaches the conclusion that “elevating” the major stipulations of the rule-based budget framework and the operational rules of the institution safeguarding the implementation into the Fundamental Law of Hungary in 2001 was unavoidable from the aspect of strengthening fiscal responsibility. The article deals with the linkages of the Stability Act, the major characteristics of the work done by the Fiscal Council and the body’s recommendations made in the last few years. Finally, it illustrates with some data the improvement of fiscal (public finance) stability supported by rule-based budgeting.

Journal of Economic Literature (JEL) code: B15, E62, H15, H61, H63, L38, P48
Keywords: fiscal policy, crisis management, debt management, fiscal stability

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  • Katalin Jakovác – László Domokos – Erzsébet Németh

Supporting Good Governance in SAI’s Audit Planning

Supporting Good Governance in SAI’s Audit Planning

Supreme audit institutions (SAIs) must conduct their audits where and when this is most needed, and where the greatest added value is generated. In line with the principles of good governance, when planning audits, in addition to risk analysis results, SAIs ideally also take social expectations into account. The support of good governance is treated as a priority, moreover, the audit focus of SAIs is also impacted by the focus of public management.

The aim of this study is to present the selection methodology supporting audit planning, as well as the characteristics of risk analysis through international examples. The study first presents the key phases and features of the planning processes of supreme audit institutions, while also pointing out how planning can support good governance. Planning comprises several interrelated phases, including the selection of audited areas, the definition of methodology, the preparation of audit programmes and resource planning. In line with the requirements of international standards, SAIs apply risk analysis in the various phases of planning. This section will also present a new trend, namely social participation.

According to its Strategy adopted by the Hungarian National Assembly, the State Audit Office of Hungary (SAO) considers as its mission to promote the transparent and sound management of public finances with its value creating audits performed on a solid professional basis, and thus to contribute to good governance. The goal of the SAO’s audits is to provide well-founded, professional and objective answers with regard to current economic and social problems, by focusing on appropriate issues at the appropriate time. For this purpose, the SAO renewed its planning system from 2011. The second part of the study presents the planning processes of the State Audit Office, developed on the basis of international standards. In order for the audits of the State Audit Office to support good governance to the greatest possible extent, the various planning phases have a hierarchic structure and rely heavily on information from the organisation’s risk database.

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  • László Domokos – Magdolna Holman

The Methodological Renewal of the State Audit Office of Hungary in Light of the Protection of Public Funds

The Methodological Renewal of the State Audit Office of Hungary in Light of the Protection of Public Funds

The change in international standards unfolding from 2007, the independence and transparency criteria applying to supreme audit institutions and the enhanced enforcement of objectivity and professionalism requirements called for the methodological renewal of the State Audit Office. Auditing guidelines and standards define the fundamental principles and norms adhered to by the SAO, which provide the basis for the quality of its audit work and reports. These principles and norms provide the framework that enables the auditors of supreme audit institutions (SAIs) to preserve their independence and the probity of their work. The effects of the renewal apply to and are felt in some form in all audit phases and organisational levels. By developing its new, quality-driven operations and by completing its methodological renewal, the State Audit Office has become a supreme audit institution which, as a professionally indispensable constitutional organisation enjoying the trust of Hungarian citizens, can support the operation of a well-managed state.

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  • Márton Nagy – Pál Péter Kolozsi

The Reduction of External Vulnerability and Easing of Monetary Conditions with a Targeted Non-Conventional Programme: The Self-Financing Programme of the Magyar Nemzeti Bank

The Reduction of External Vulnerability and Easing of Monetary Conditions with a Targeted Non-Conventional Programme: The Self-Financing Programme of the Magyar Nemzeti Bank

In addition to its primary task of achieving and maintaining price stability, the Magyar Nemzeti Bank (Central Bank of Hungary – MNB) views the reduction of Hungary’s external vulnerability as a key priority. For that reason in the spring of 2014 the central bank introduced the Self-Financing Programme, in the context of which its policy instruments were restructured in order to crowd bank liquidity out of the sterilisation instruments and redirect it to the market of liquid securities. The Programme has met its initial goals as the external vulnerability of Hungary has decreased significantly. Between spring 2014 and December 2016 the Hungarian government repaid EUR 11 billion of its foreign currency debt from forints, the foreign currency ratio of government debt lowered to around 25 per cent from the previous 50 per cent, while gross external debt decreased also significantly. While the primary goal of the Programme was to reduce Hungary’s external vulnerability, the measures were also intended to facilitate the easing of monetary conditions in an unconventional way. The yield-impact of the Self-Financing Programme could be around 75–90 basis points which makes that the Programme supplemented the yield-effect of central bank interest rate cuts with a magnitude of one half of their effect between 2014 and 2016.

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  • András Giday – Szilvia Szegő

“Getting Over” National External Indebtedness – Or Is Baron Munchausen’s Story Not a Mere Fairy Tale After All?

“Getting Over” National External Indebtedness – Or Is Baron Munchausen’s Story Not a Mere Fairy Tale After All?

The question of this article is how it was possible for the Hungarian economy to set on a growth trajectory after a W-shaped crisis despite a continuous and severe withdrawal of external resources. The country’s net external debt relative to GDP dropped by nearly 30 percentage points within five years, representing a 5–6 percentage point reduction per year. Why has the economy not suffered an even greater setback as a result of such a rate of “loss” in financing resources? Is growth possible without resources? Obviously not.

This paradox was resolved when sources of financing were re-channelled into the internal supply of sources. The reason is that financing is similar to an electrical network: if connections are weak, power is lost. The country’s excessive openness caused a significant loss of power (as tackled in this study), so the closing and reconnection of the money circuits to the internal resource supply (as amply illustrated in this study) increased the “power supply” to the economy.

Numerous actions taken by the national bank and the government took the country in this direction. From the area of financial regulation, the authors have selected the steps of allowing the moderate weakening of the Hungarian forint, the conversion of Swiss franc loans into forint loans, and the Funding for Growth Scheme (FGS). With regard to government measures, the focus is placed on cutting employment taxes, promoting community work, curbing monopoly profits, and channelling retail savings into financing sovereign debt. All this has set the economy on a trajectory where self-healing mechanisms have had an opportunity to start. Applicable financial funding of the national economy was an important key in answering the question raised in the article. Nevertheless, our other conclusion is that there is much to be done in the financing of corporations in a similar direction of funding.

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  • Bianka Parragh

Competitiveness and Economic Stimulus. New Dimensions and Instruments of Monetary Policy

Competitiveness and Economic Stimulus. New Dimensions and Instruments of Monetary Policy

The revolution in economic and fiscal policy that has been brought about since 2010 and the revolution in monetary policy implemented since 2013 have provided reasonable grounds for strengthening the regional competitive position of Hungary. The business climate in Hungary has changed for the better, a tendency which was indisputably triggered by the innovative and effective role undertaken by the state. The efficient role of the state was embodied in its concept innovation, meaning a changed viewpoint at the root and branch level of economic policy. From a monetary aspect, the state’s contribution to economic productivity and a monetary policy that builds on unconventional instruments to provide a long-term stimulus to the economy have proven its commitment to economic development using innovative methods in line with an economic policy that establishes a goal structure with new criteria and a new composition. This study focuses on monetary policy and analyses the effects of the successful measures and innovative methods which have enhanced competitiveness and stimulated the economy.

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  • Péter Novoszáth

The Main Challenges and Risks for Social Security Systems in the European Union. The Essence of Reforms in Hungary After 2010

The Main Challenges and Risks for Social Security Systems in the European Union. The Essence of Reforms in Hungary After 2010

In all Member States social security systems are used to help secure social goals such as protection against poverty. In the majority of European Union (EU) countries public schemes also play a core role in securing levels of pension benefits and health services that to a reasonable degree allow people to maintain the living standards from their active years into retirement. After 2010 the objective of comprehensive pension reform in Hungary was to return to the two-pillar pension system, based on social solidarity on the one hand and voluntary contributions on the other, which is in place in eighteen EU Member States, from the former Hungarian three-pillar system which is hopelessly threatening the budget balance, and is financially unviable in the short, medium and long run. Having accomplished this transformation, the government is committed to maintaining and supporting voluntary private pension funds parallel to the state-run social security pension pillar. In the second half of 2010, as a result of the world economic crisis and the restriction measures linked to it, a major crisis evolved which required a series of immediate measures from the new Hungarian government formed in that year. How did the new government manage to consolidate the Hungarian pension system? You can find more details in this article.

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  • Ákos Szalai – Pál Péter Kolozsi

What Shall We Do for a More Competitive Hungarian Economy? Thoughts About the Monograph Competitiveness and Growth of the Magyar Nemzeti Bank

What Shall We Do for a More Competitive Hungarian Economy? Thoughts About the Monograph Competitiveness and Growth of the Magyar Nemzeti Bank

Since 2010 Hungary has implemented a major turn in its fiscal policy which was followed by a fundamental change in its monetary policy resulting in a new era concerning the growth of the Hungarian economy. These changes form the basis of an economy being simultaneously characterised by balance and growth. Over the last six years the position of the Hungarian economy has been improving significantly especially concerning the quantitative aspects of competitiveness, the results of which have been recognized by financial and capital markets in addition to international organizations and the major credit-rating agencies. However, a faster and more sustainable convergence requires an improvement concerning the qualitative characteristics of the economic resources as well. For an outbreak from the moderately developed economic status it is essential to speed up the catch-up process with additional reforms focused on competitiveness. Along with the relevant international best practice and the theoretical background, the new volume of the book series of the Magyar Nemzeti Bank entitled “Competitiveness and Growth” presents also the necessary measures for that “competitiveness revolution”.

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  • Ágnes Csiszárik-Kocsir

Crisis and Financing – or the Practical Financing Decisions of Hungarian Small and Medium-sized Enterprises

Crisis and Financing – or the Practical Financing Decisions of Hungarian Small and Medium-sized Enterprises

The standard operational mechanism of economies was substantially overwritten by the economic crisis of 2008. Due to the relative abundance of resources and the lenient banking practices prior to the crisis that focused on bonuses, there were no barriers to lending, which was possible both in foreign or in the national currency. The financial problems that followed the outbreak of the crisis ended the previous lending practice, and the abundance of resources was replaced by poor liquidity, which – along with the macro-economic predicaments – further complicated the struggle by companies to keep their heads above water. The indebtedness of the private sector, increasing input costs, the tightening of the markets and the decline in consumption caused such difficulties in financing enterprises both at a national and international level that after several years a solution had still not been found for them. The negative effects hit the most those small and medium-sized enterprises that had only limited or no access to the international capital markets. The aim of this present paper is to show the transformation of Hungarian small and medium-sized enterprise financing based on the academic literature and the results of questionnaire-based research, and to highlight the main problems and the reactions to them that point the way to recovery. A further goal of the paper is to present the future path for financing the sector and the factors that will influence this path through an improvement in the tax system or support for credit.

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  • Tamás Rózsás

China in Europe. Hungary’s Key Role in a Strategic Partnership

China in Europe. Hungary’s Key Role in a Strategic Partnership

One of the major trends in the world economy in the past two decades was the ascent of China. The fast-growing Chinese economy is already the second largest in the world with an outlook to take the first place from the United States within ten years. Moreover, China is already the world’s largest trading nation. At 3225 billion dollars, its volume of trade surpassed the trade volume of the United States in 2010 (Scott– Sam, 2016). With its economy growing, China is also becoming more ambitious. U.S. – China trade approaching 600 billion dollars in 2015, China’s economic ties with the United States are already strong. Within the framework of its new land and maritime silk road initiative, China is now reaching out to Europe. As one of the largest economies and markets, and new global companies like Huawei and Alibaba, China is an important trade and economic partner. On the other hand, it is also a potent competitor for markets and resources. Is the ascendance and expansion of China an opportunity or threat? Does China naturally look for partners for mutual benefits and development or does it seek to control the world? Probably both. We attempt to help the reader answer these questions for themselves by looking at various aspects of Chinese expansion towards Europe including investment, trade, Chinese companies in Europe, and some characteristics of Chinese economy and society that may guide its path of future development.

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