Catching up in the wake of the crisis? – The quality of fiscal policy and economic growth

Abstract

With a view to its economic policy during the 2007–2009 financial crisis, Hungary – for the first time in many years – has been one of the most disciplined countries. In this context, the author seeks to find out whether this relative improvement in fiscal policymaking is sufficient to lay the foundation for future convergence and whether it contributes to putting Hungary's economy on a track of sustainable growth. In answering this question, the study first reviews the literature of theories regarding correlations between the quality of fiscal policy and economic growth, highlighting six impact mechanisms. Then the interrelations of mechanisms between fiscal policy and growth and their impact on real economy processes are presented using the experiences of Portugal, where – due to euro-area membership – the central budget plays an especially important role in fostering economic growth and adaption to various shocks. The main conclusion of this paper is that the mere quantitative change of fiscal policy elements cannot yield lasting results unless the q