The Role of General Government in Hungary

The objective of this study is to present the changes in the general government’s role in the distribution and generation of income and in the functions of the state. The period under study is 1991-1997, with an emphasis on the fiscal adjustment which occurred during the years 1995-1996. In relation to this, a separate chapter addresses international experiences in fiscal consolidation and its theoretical aspects. In the period under study, the general government had a certain stabilizing impact. Up to 1993, overspending by the government retarded economic decline and following the commencement of economic growth the adjustment program which became necessary owing to the unsustainability of the external and internal equilibrium put the brakes on growth in the short term. Based on international experience, the most important factor for success is to be sought in the structure of the adjustment. This study concentrates on the presentation of structural changes, and particularly the structure of primary expenditures and revenues, even though its point of departure was the changes in the level of total expenditures and revenues of the general government. Between 1990 and 1997, the volume of the primary levels declined by nearly one quarter and the rearrangements which were effected within this were even more significant. It can be established that the decline was most vigorous on the expenditures side, in the case of expenditures on wages and transfers (particularly with respect to households). According to international experience, the savings achieved precisely in this area can be a guarantee for the lasting success of fiscal adjustment. However, the fiscal retrenchment of 1995-1996 in Hungary does not present us with a clear picture. Personal income tax was increased, there were tax increases of a one-off nature and cuts in public investment, too. This kind of measures were identified as less successful ones by international studies. According to statistics using the prime cost approach, the role of the public sector in income generation declined, as wage costs declined. Were it possible to take quality criteria into account when specifying performance, the picture would be different. According to international experience, some public sectors do not contribute to income generation even at prime cost, and in these areas it is possible to reduce spending without suffering any deterioration in performance. A counterexample can be provided by the tax administration, where a very close correlation can be demonstrated between wages and efficiency. The impact of the Hungarian measures, particularly with respect to changes in the number of persons employed, cannot be evaluated negatively in this respect. In addition to an institutional approach to general government, it is also important to take functional aspects into account - that is to say, it is necessary to the fiscal transparency to demonstrate quasi-fiscal activities performed outside the general government. (This study does not undertake to do so.)