The 2006 Oxford Analytica report on Hungary's fiscal transparency accorded a rating of "compliance in progress," noting that Hungary has continued to move forward in its efforts to improve transparency and accountability and to impose fiscal discipline following the recent experience of fiscal challenges. In a 2007 Report on the Observance on Standards and Codes (ROSC), the International Monetary Fund (IMF), confirmed that Hungary had increased its level of transparency in the years since the original ROSC of 2001, especially in the area of fiscal reporting. However, both assessments noted that issues of political interference and attempts to improve published fiscal positions through off-budget measures during the run-up to the 2006 elections has led to a loss of credibility with regard to Hungary's fiscal reporting. The ongoing transition to the adoption of the 2001 Government Finance Statistics Manual standards, for which the Ministry of Finance has enlisted the help of the IMF and Eurostat, is expected to significantly improve transparency in Hungary's fiscal policy. The IMF also notes that improvements to fiscal transparency in various areas should facilitate Hungary's entry into the Euro area.

General Overview

The 2006 Oxford Analytica (OA) report on Fiscal Transparency in Hungary conferred an overall assessment of "compliance in progress" (p. 158), noting that Hungary generally complies with international best practices but has lost much fiscal credibility due to events preceding the parliamentary elections of 2006. Structural reforms are called for, including the adoption of a credible medium-term budget framework with firmly established spending ceilings applicable to all chapters of the budget. Hungary's 2006 Convergence Program for the European Union (EU) also provides for "better transparency, stronger political accountability, and renewed policy credibility" (p. 158). Additionally, the move toward implementing an accounting system in accordance with the Government Finance Statistics Manual of 2001 (GFSM2001) is ongoing, with the Hungarian Ministry of Finance (MoF) working in concert with both the International Monetary Fund (IMF) and Eurostat toward this end.

In 2007, the IMF published a Report on the Observance on Standards and Codes (ROSC) for Fiscal Transparency. It noted that Hungary had increased its transparency levels in the years since the original ROSC in 2001, especially in the area of fiscal reporting, which now covers "virtually all of the government" (p. 1). Nonetheless, the IMF cautions that fiscal transparency suffered from the attempts of the Hungarian government on various occasions in recent years to conduct off-budget transactions with the desired effect of "reducing the measured deficit and debt without changing the underlying fiscal position" (p.1). The IMF also notes that improvements to fiscal transparency in various areas should facilitate Hungary's entry into the Euro area.

The OA report noted that fiscal difficulties were compounded by the disclosure that, in the run-up to the 2006 parliamentary elections, the true fiscal situation was concealed for political purposes. This blow to fiscal credibility has increased the pressure to achieve greater transparency and accountability on the fiscal policy front. Sustainable fiscal consolidation has become the goal, necessitating a medium-term focus. The government has also accepted the need to bring its extrabudgetary funds into the budget, and has put together a reform package to accomplish this aim. As part of the project to adopt the GFSM2001 accounting system, OA reported, "a number of non-budgetary units have already been reclassified as general government entities" (p. 159). Steps have also been taken to reduce the size of the public sector through "a consolidation and regional reorganization of the central administration and its decentralized bodies" (p. 159).

The IMF's 2007 Article IV Consultation noted that Hungary's recent fiscal problems were addressed in part by a fiscal consolidation plan that "relied to a greater extent on tax increases than advised by the Fund" (p. 4). The report commended the authorities' efforts toward improving fiscal transparency and accountability, including the exploration of new fiscal rules and the submission of fiscal policy to independent scrutiny. A key concern is the establishment of a sustainable fiscal outlook. The IMF noted that fiscal challenges ahead are "formidable" (p. 11). Public debt needs to be reduced, and fiscal imbalances are inhibiting economic growth. The implementation of new fiscal rules, along with the adoption of a medium-term framework that targets expenditures and a strengthening of the budget monitoring process, are part of a plan to improve fiscal discipline, but the IMF cautioned that this will require "concerted leadership" (p. 19). Additional measures suggested by the IMF include reforms in the system of public financial management and the budgetary process. Hungary is a subscriber to the IMF's Special Data Dissemination Standard (SDDS) and meets or exceeds all requirements for coverage, timeliness, and periodicity in its reported data. Also in 2007, the IMF produced a Fiscal Transparency Report on the Observance of Standards and Codes (ROSC) that replaces all such ROSCS produced since 2001. The overall finding of the new ROSC was that "Hungary complies with the Code of Good Practices on Fiscal Transparency in many respects, and has improved compliance in a number of areas in recent years" (p. 37). Nonetheless, the report noted that there was room for improvement, and singled out "the use of transactions to improve the apparent, but not the actual, fiscal position" (p. 37) as a practice that must be discontinued.

The Principles

Clarity of roles and responsibilities.

CP

According to the OA report of 2006, Hungary has earned a rating of "compliance in progress" for this principle. There is a clear legal distinction between the general government and the rest of the Hungarian economy. Central government units are defined to include the extra-budgetary and social security funds. In addition, there are county and municipal governments that are defined as self-governing entities but which are heavily reliant on central government funding. (For budgetary purposes, the capital city of Budapest is categorized as a county-level government unit.) The subnational governments are subsumed under seven administrative regions. The Act on Public Finances of 1992 defines the government as comprising the state budget, central government institutions, extrabudgetary and social security funds, and local governments. There are other non-budgetary units, however, that are excluded from this definition, contrary to IMF and Eurostat practice and the requirements of GFSM2001. As Hungary moves further toward the full adoption of the GFSM2001 standards, many of these units have been reclassified as part of the general government, according to the OA report.

The chief elements of Hungary's fiscal legislative framework are the Constitution, the 1992 Act on Public Finances (much amended), the 2000 Act on Accounting, and the 1990 Act on Local Government. OA notes that, although Hungarian law "generally conforms to international best practices," it nonetheless "leaves budgetary entities a certain amount of flexibility in varying and reallocating their expenditures" (p. 164). In addition, it is generally perceived that the Act on Public Finances has been amended so often only to address short-term concerns, and thus it is not seen as a "stable institutional framework for budgetary decision making" (p. 164). In addition to the core legislation, the 2003 Act on the Order and Regime of Taxation, in combination with the Act on Local Government, provides the legislative framework for central and local tax regimes. According to OA, "customs legislation broadly conforms to EU standards. At the national level, the Tax and Financial Control Administration handles tax administration, while customs are the responsibility of the Customs and Finance Guard under the supervision of the MoF. Another relevant law is the 1992 Act on the Legal Status of Public Servants (No. 23), which serves as the primary ethical standard for public servants and covers issues of conflict of interest, compensation, liability, promotion, and discipline.

The OA report noted that the central Treasury was created in 1996 under the MoF's auspices in order to streamline the management of the country's numerous budgetary units. Formerly individual accounts maintained by the various elements of the general government, including the extrabudgetary funds, were consolidated into a single Treasury account. According to OA, "in accordance with the Convergence Program presented in September 2006, the government intends to implement a package of short- and long-term reforms to bring extra-budgetary funds into the budget" (p. 161). It is expected that these reforms will achieve a reduction in extra-budgetary units by one-third. The OA report also made mention of a special "open-ended budgetary item" category, into which certain appropriations fall. These items, which include subsidies for healthcare and housing, are allowed to exceed their budgetary allocations. However, OA stated that this mechanism is transparently regulated and has little impact on the central government's fiscal deficit. Hungary has been moving toward greater decentralization of its spending arrangements, handing over many responsibilities for service provision to local governments in the areas of health, education, and utilities. Nonetheless, the bulk of the revenues for local governments come from the central government, which OA found to add a degree of uncertainty as to whether the local authorities are able to deliver the necessary services. The OA report notes that there is a plan in the works that would "facilitate a reallocation and streamlining of tasks by substantially reducing the amount of normative grants available to local governments, relying on supplementary transfers conditional on their efficient performance of tasks instead" (p. 162). Alternatively, the local tax system could be reformed to permit more local control over the generation of tax revenues.

According to OA, "all budgetary appropriations, revenues, and expenditures are channeled through the Treasury" (p. 162). The Treasury serves as the financial management arm of the central budget. It handles all the reports produced by budgetary units and compiles the annual final accounts of the central government. The central bank, Magyar Nemzeti Bank (MNB), while independent, works with the MoF in a number of areas and produces fiscal projections that, in the past, have been significantly more negative than those of the MoF. However, according to OA, recent changes in MoF methodology have brought the forecasts of the two institutions into closer alignment. Central government public debt is managed by the Government Debt Management Agency (AKK), which also manages the extra-budgetary and Social Security funds. The AKK is a fully state-owned enterprise (SOE). Beginning in 2004, the AKK took over the active cash management of the Treasury account. It does not participate in the formulation of fiscal policy.

Ongoing reforms meant to privatize government holdings in real estate and the corporate sector are handled through the Hungarian Privatization and State Holding Company (ÁPV). According to OA, "the justification for a separate privatization agency is somewhat questionable at a time when the government portfolio is small and successful privatizations very rare" (p. 163). Most information on the privatization process is available to the public, but the OA report found that the information on the use of funds realized by privatization is difficult to understand. OA also noted that Hungary has significantly reduced its reliance on quasi-fiscal activities (price regulation) since 2003. Price controls are now limited to the transportation sector.

According to the IMF's 2007 Fiscal Transparency ROSC, Hungary now employs a definition of general government that is largely in line with the principles of European Standards of Accounting, 1995 edition (ESA95) and the Government Finance Statistics Manual. The legal definition and allocation of fiscal roles and responsibilities across the executive, legislative, and judicial branches of government are clearly established, and there is a clear definition of the mechanisms to be used in coordinating and managing budgetary and extrabudgetary activities. Monetary and fiscal roles are clearly separated, and the MNB's independence is strong. There are ongoing efforts toward the simplification of government regulation of the business sector, but the situation remains complex and more work is needed. The privatization process is subject to a clearly established legal framework. Tax law is also "clear and comprehensive" (p. 37), but there is a need to develop a better defined civil servant code of conduct, even though there have been some improvements in the law regarding conflicts of interest. The IMF 2007 ROSC also reports that "the legal framework for management of public funds is mostly clear and comprehensive. The transactional coverage of the budget has been extended substantially in recent years" (p. 36).

Open budget processes

CP

The 2006 OA report accords Hungary a rating of "compliance in progress" (p. 170) for this principle. The fiscal year runs from January through December, with the budget for the upcoming year submitted to parliament in September along with the State Audit Office's opinion thereof. Discussion then takes place, and the final vote on the budget occurs in December. The submitted document includes reference to the underlying macroeconomic framework and clearly sets forth the policy objectives and potential risks. The current year budget forms part of a larger (medium-term) framework that looks forward an additional two years. If there are significant unanticipated changes in the fiscal environment, the government is permitted by law to offer a supplementary budget, but this occurs rarely according to the OA report. A draft amendment to the Act on Public Finances aims to restrict the government's latitude to commit to additional spending without parliamentary approval. The introduction of medium-term fiscal planning arises from Hungary's status as an EU member that has not yet adopted the euro, a status that necessitates the annual filing of Convergence Program reports. According to OA, this obligation has helped commit the government to a longer-term approach in setting its fiscal policy. Still, the targets set in such reports tend to be revised with some frequency, according to OA.

The OA report noted that the MoF does not make publicly available the framework that it employs in generating its fiscal forecasts, although it began publishing its basic macroeconomic model in 2001. There is no presentation of alternative economic scenarios contained within the budget documents, even though the information is available and is included in the Convergence Program presented to the EU. There is no formal quantification of risk within the budget, even though OA found that the MoF does carry out internal sectoral risk analysis. OA reported that the State Audit Office "has called on the government to pay greater attention to revenue risks in its budget documentation" (p. 171). The government's risk management strategy is to create special budgetary reserves, but OA found that this has not been fully implemented. Carry-over of unspent funds into the next budget year is not allowed, and the practice to date has been to apply any such monies to help meet fiscal targets. Fiscal sustainability has gained a high profile in Hungary as a result of its recent fiscal challenges, which include an excessive public deficit. According to OA, the government's problems with imposing fiscal discipline may threaten its ability to achieve euro adoption, the deadline for which has been pushed back more than once.

The OA report notes that "Hungary produces and disseminates a comprehensive range of budgetary information, facilitating analysis and promoting accountability" (p. 172). It does not include a complete disclosure of its compilation methodology, although the central government data does follow GFSM2001 standards. All data posted to the SDDS, however, is GFSM2001-compliant. Until the transition to GFSM2001 is complete, accounting is done according to a mix of cash- and accrual-based accounting. OA does add, however, that Hungary continues to work with both the IMF and Eurostat to harmonize its methodology to GFSM2001. According to OA, the principal problem areas are "the compilation of intermediate fiscal statistics and the dissemination of metadata" (p. 172). The OA report adds that "the Act on Public Finances stipulates that the central government, social security funds, extra-budgetary funds, and sub-national governments must present their final accounts to the parliament within eight months of the end of the year" (p. 174).

The Treasury has assumed the bulk of management responsibilities with regard to fiscal flows through a unitary account, according to OA, although some public entities still maintain separate accounts, as do local governments. There is some flexibility to adjust budget appropriations through post facto amendments, but OA finds that "they do not negatively affect transparency" (p. 173). The MoF monitors budget execution, and reports on its findings on a monthly basis, with public access to these reports via the MoF website. OA characterizes these reports as being only summary in nature. Local governments provide semi-annual and annual reporting on budget execution, as well as quarterly summary reports. Municipal revenues and assets are monitored by local financial committees, which report to the municipal councils. OA adds that as of October 2001, an independent budgetary body called the Central Harmonization Unit was created, supervised by the MoF, and is charged by law to develop, coordinate, and harmonize the system of internal financial controls required of all public entities. The OA report also notes that 2003 saw the passage of a decree that permits internal financial and performance audits to follow international best practice. Internal audits are summarized and submitted to the MoF every year by each budgetary entity, and these are then consolidated into a broader, more comprehensive report that the MoF submits to the government. Special internal audits are conducted by the Prime Minister's Government Control Office (GCO). Specific audit requests are set forth in an annual plan at the discretion of the Prime Minister, and the plan is subject to government approval. Such audits occur infrequently, according to the OA report. The primary focus of such audits is the control of EU funds. Audit reports are not made available to the public. If problems are disclosed by the audit process, the reports may be forwarded to the appropriate ministry for corrective action. The OA report notes that "the GCO does not have a high degree of credibility, as its tasks are highly politicized" (p. 174). To address this shortcoming, legislation was passed that sought to impose greater regulatory clarity and improved audit standards.

The 2003 Act on Public Procurement is described by OA as "fully EU compliant" (p. 174) and in line with international best practice. It does not, however, cover the non-financial public enterprises or all government agencies. The anti-corruption "Glass Pockets" program requires that all contracts involving public funding in excess of 5 million forint must be made public. Any publicly funded operation is subject to State Audit Office scrutiny. Also EU-compliant are the recruitment procedures for civil service, which is regulated by law. Aspirants to civil service employment must possess the appropriate qualifications and submit to civil service examinations. OA found that although there is some evidence of political considerations in the filling of some posts, "these are not sufficient to fundamentally distort the process" (p. 174). Professional behavior within the civil service is covered by the 1992 Act on the Legal Status of Civil Servants and the Code of Ethics for Civil Servants. Performance is reviewed annually.

According to the 2007 IMF ROSC, Hungary's "medium-term fiscal policy objectives are clearly stated" (p. 38) but the report adds that there is a lack of clarity in explaining the linkage between policy objectives and the methods used to achieve them in the annual budget, the discussion of the objectives and expectations arising from government activity is not detailed, and there is no clear statement of fiscal rules. The budget documents do offer a clear presentation of forecasts and the macroeconomic assumptions on which the budget is based. On the other hand, the costing of projects and policies does not offer a clear distinction between existing policies and new initiatives. The IMF ROSC agrees with OA's assertion that the budget provides inadequate treatment of fiscal risk. The ROSC notes that the accounting system is comprehensive and adds that government procurement is consistent with international best practice. On the other hand, the procedures for civil service recruitment could be improved. Although the ROSC reports that "the overall balance of general government is reported," it adds that "the public sector balance is not reported" (p. 38). The tax administration should be provided better legal insulation from political interference. The ROSC notes that the internal audit processes have been improved in recent years, but more work is needed in this regard. The report further observes that the legislature is provided with audited final accounts "within eight months of the conclusion of the budget year" (p. 38). Finally, the ROSC notes that the parliament does not receive in-year reports on budget execution or reports on budget performance, and does not conduct a mid-year review of the budget.

Public availability of information.

CP

According to the 2006 OA Fiscal Transparency Report, Hungary has achieved a rating of "compliance in progress" (p. 166) for this principle. Article 114 of the 1992 Act on Public Finances requires that a budget information system be put in place to facilitate "the planning of the financial processes of the public finance system [and] the establishment of the targets/quotas of the budget and that will be suitable for the analysis, appraisal and controlling of the realization of the budget." OA noted that Hungary's attempt at a rolling three-year fiscal framework, developed during its push to join the EU, has been problematic. Medium-term budget objectives are limited to "non-binding deficit targets for the following two fiscal years" (p. 166). Policy making tends to be improvisational and accountability is weak. The government has, however, announced its intention to improve the framework.

OA also noted that there is some disclosure of tax expenditures contained in the Final Report on the Fulfillment of the Budget. Reports on state aid originating with the central government are produced by the MoF's State Aid Monitoring Office, and include some disclosure of quasi-fiscal activity. This information is publicly available through the parliament. Another resource for information on government subsidies is the National Support Monitoring System maintained by the Treasury. According to OA, this system "provides a useful tool to control aid accumulation and offers detailed statistics of support forms and beneficiaries by regional repartition, thus increasing transparency" (p. 167). The government also reports on the value of government-held financial assets. This information must be provided by all units of the general government on a quarterly and annual basis. Such reports tend to exclude some PPP data, however, according to OA. Reporting on fiscal statistics is viewed by some as unreliable, due largely to continuous, unanticipated revisions. However, the IMF's SDDS website discloses that Hungary's fiscal data meets or exceeds all requirements for coverage, timeliness, and periodicity. The SDDS site displays advance release calendars, and this information is also available from the MoF and on the Treasury website.

All economic units that participate in fiscal activities are required by provisions of the 2001 Act on Public Finances to issue regular reports according to requirements established by law. Some, such as the APB, report monthly and quarterly, others - the majority - provide annual reports. Changes in the composition of the annual budget document have led to the addition of "comprehensive coverage of general government operations" (p. 167), according to OA. A mid-year budget report is also produced. The end-year budget document looks at the degree to which budget expectations have been met by actual results. The MoF website discloses that there is public access to monthly reports on the central government's fiscal position. While progress continues in the adoption of GFSM2001 definitions and methods, OA reported that Hungary's definition of central government is not yet fully compliant. 2003 legislation now requires that discrepancies between non GFSM records and records produced according to GFSM2001 be explained. The Central Statistics Office (CSO) uses GFSM2001 standards for its quarterly submission of general government statistics to Eurostat. The MoF's website discloses that the ministry does provide access to some publications, but these are few in number, and according to OA, they are of highly variable quality. The MNB website offers access to financial accounts statistics. The CSO publishes non-financial account statistics.

OA reported in 2006 that the Hungarian anti-corruption program, called "Glass Pockets," aimed to improve transparency through requiring comprehensive public disclosure of the finances of central and subnational fiscally relevant data. The information to be disclosed includes procurement contracts, information regarding the management and structure of public entities, and rules regarding the management of public property. Further legislative reforms are planned, and OA has reported that "the government has prepared a detailed timetable for the submission of comprehensive legislative amendments aimed at undertaking structural reforms" (p. 168). A 2006 amendment to the Act on Public Finance requires quarterly reporting to the public. With the significant reduction in quasi-fiscal activities, reporting on such activities has improved, at least for those related to PPPs. As OA reports, the Treasury website offers access to a wide array of fiscal data, including "the central government balance, social security funds balance, extra budgetary funds balance, accounting balances, budgetary and closing accounts acts can be found" (p. 168). At present, much of the website content is in Hungarian only, but a notice on the site asserts that an English-language version of the content is under development.

The 2007 IMF ROSC reports that most general government fiscal activities and the consolidated fiscal position of the government are included both in the budget documents and the annual reports on budget execution. The report adds that although the budget offers fiscal aggregates covering the prior two years, it does not offer forecasts of future-year spending, revenue, or financing, and it does not include coverage of quasi-fiscal activities. Its coverage on contingent liabilities and tax expenditures is very limited. On the other hand, it offers coverage of debt and financial liabilities and makes advance-release calendars available. The 2007 ROSC and the IMF's SDDS website both disclose that there is no legal obligation for the MoF to publish fiscal information. As the SDDS website states, such data dissemination is done by the MoF as a "public service."

Independent assurances of integrity.

CP

According to the 2006 OA report, Hungary has achieved a rating of "compliance in progress" (p. 176) for this principle. The SDDS website discloses that Hungary meets or exceeds its standards for coverage, timeliness, and periodicity with regard to fiscal reporting. According to OA, "the data are typically presented in a GFSM 1986-compliant format and only the classification of some extra-budgetary institutions in the general government represents a deviation from international best practices" (p. 176). Source data is cross-checked and the statistical techniques employed are considered sound. The transition to GFSM2001 methodology is being facilitated by the MoF through its work with both the IMF and Eurostat. The independent SAO scrutinizes fiscal data as part of its constitutional mandate and under the provisions of the 1998 Act on the State Audit Office. Answerable only to parliament, the SAO's independence was strengthened with a 2004 amendment that created a separate SAO budget. OA suggests that there may be even further enhancements to SAO autonomy going forward, but noted that some commentators doubt the existence of sufficient political will to bring these plans to fruition. The SAO enjoys a reputation for efficiency and professionalism. Although it reports to parliament on an annual basis, it does not need to seek parliamentary approval for its plan of action. OA notes that although the SAO's recommendations generally are acted upon, there is a contentious relationship between the SAO and the government. By law, the SAO must report to parliament regarding the government's annual budget proposal. It is also mandated to review the final accounts, which it must receive within 6 months of the fiscal year's end, upon which it must then report to parliament. The SAO reports concern themselves with legal and regulatory compliance, policy consistency, forecasting, and appropriations. The SAO also reviews EU fund usage. OA notes that "the quality of audit has tended to be lower and its remit less comprehensive in the fragmented subnational sector" (p. 177). The SAO information services are of a high quality, according to the OA report. It has begun expanding its focus to include not only financial compliance but also performance auditing. Government agencies are typically the subject of a comprehensive audit every four or five years. If irregularities are disclosed, the offending unit must submit a compliance plan, which must be verified within a year. The SAO also audits private companies that have been awarded public contracts.

The operationally independent CSO is subject to government supervision. As the OA report notes, it "is responsible for the production and publication of all official data pertaining to the socioeconomic and demographic situation of the country (p. 178). OA finds the CSO to be adequately staffed and resourced. It is governed by the 1993 Act on Statistics, which grants it the authority to require information from all state agencies that participate in the Official Statistical Service. By law, it reports annually to the executive and legislative branches of government. Source data is provided by the MoF, Treasury, tax administration, and Social Security Fund (the MoF also passes along data received from subnational governments). OA reports that MoF and Treasury data is generally accepted as received, whereas wage and tax data are subject to cross-checking. According to OA, "in general, there are relatively few tools for quality control in the fiscal sphere (p. 178). The CSO works with the MoF and MNB to develop the methodology and standards to be applied to Hungary's statistical product. According to OA, this arrangement has led to substantial improvements in the quality of official statistics, and has contributed to progress toward the GFSM2001 transition.

The OA 2006 report commends the Hungarian civil service as "highly professional and relatively well-paid" (p. 165), but notes that corruption is still an issue. OA cites the 2006 Transparency International Corruption Perceptions Index, which accorded Hungary a score of 5.2 (with 10 signifying "perfection"). Nonetheless, within Hungary, the public views the police, healthcare professionals, and tax, and customs officials as corrupt. Contributing to the problem is the fact of corruption in the funding of political parties. In response, according to OA, a new program "designed to increase transparency in public life" (p. 165) has been implemented, with some success. The 2007 IMF ROSC reports that "budget estimates are not a reliable indicator of the actual budget outcome" (p. 38). Although the ROSC finds that the accounting policy employed in producing budget documents and final accounts are "well-defined" (p. 39), there is no formal disclosure of that policy included in the documents. Independent external audits of the government accounts are presented to the public and parliament in a timely manner. The law provides the CSO with the requisite independence of operation. Finally, the ROSC states that "the process of accounts reconciliation is largely effective" (p. 39).