Credibility and Flexibility – Changes in the Framework of Hungarian Public Finances

Abstract

This paper presents the three most important institutional steps that Hungary took in 2010 and 2011 to promote the responsible management of public funds. It provides a detailed analysis of the strict provisions of the new Constitution regarding public finances, the strengthened mandates of the Fiscal Council and the renewed audit instruments of the State Audit Office of Hungary. The transformation of the institutional system and the regulatory environment was necessary because the significant increase in debt indicated that the earlier, more permissive regulation failed to attain its target. Experience confirmed that without strict rules and reinforced institutions it is not possible to regain the credibility of fiscal policy and to ensure the economical and responsible financial management of the public sector. The paper explains that Hungary’s new fiscal rules represent an unprece-dented fiscal commitment even at international level, and that the constitutional powers of the Fiscal Council and the resulting rigour are unique in the world.