OECD says Hungary's austerity plan will bring dividends in long term

By bne IntelliNews May 22, 2007

Organisation for Economic Cooperation & Development -

Budget consolidation is dominating the political agenda. The Hungarian government has embarked on an ambitious four-year consolidation programme following another election-year peak in the deficit in 2006 at 9.2% of GDP. The immediate revenue increases and spending cuts are temporarily damping growth. However, if all goes according to plan, the programme will bring dividends to the economy in the longer term. This payoff is crucially dependent on:

1. Discipline in budgetary processes. Work needs to continue on strengthening budgetary mechanisms. A system of binding medium-term spending limits should be considered. Budgetary reform also needs to extend to the sub-national governments.

2. Success in maintaining spending freezes. The re-scheduling that brought forward part of the 13th month payment to public-sector workers this year does not affect achievement of the 2007 fiscal target in accrual terms. Nevertheless, looking forward, strong resistance to spending pressures arising from revenue windfalls is of key importance.

3. Implementation of the structural reform programme. The healthcare reforms that are expected to deliver a large share of fiscal savings are reasonably well advanced and a welcome cut in gas-price subsidies is already reducing government spending. The reforms in education are positive but the changes to the tuition–fee system in particular should go further. It is more uncertain, however, whether all the planned cuts in government administration will be realised.

Successful reform of public spending requires the participation of the counties and municipal governments. There are potential savings in administrative overheads here too and sub-national governments are responsible for providing many government services. In-depth review of these issues in this Survey reveals a need to:

4. Capture economies of scale. Political constraints preclude widespread mergers among the large number of small municipalities. However, the joint provision of services is widespread and should be encouraged further. Efforts to rationalise through replacement of county-level governments with regional assemblies should continue.

5. Reform financing systems. The financing of sub-national government needs simplification and greater transparency and oversight in accounts. Also, the benchmarking of services via output and performance indicators needs to become more widespread. Reform of local taxation should include widening of property tax and removal of the local business tax.

Hungary’s low employment rate remains a key structural handicap to economic performance. There has been welcome reform of unemployment benefits and early-retirement pensions. Planned reforms to disability pensions look promising and a concrete proposal for old-age pension reform is in the pipeline. This Survey looks in depth at the issue of prolonged parental leave and other aspects of family policy:

6. Current efforts to boost childcare services are welcome. Future reform needs to consider further strengthening of central-government provision requirements on municipalities regarding these services, matched by appropriate funding. A system of childcare vouchers for parents would be one way of increasing efficiency in the provision of services. Reform to the very long parental leaves should be considered, along with changes to the attendant system of additional cash benefits. Savings could be used to help fund increased childcare services.

To read the full report click here.

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