Analysis of the macroeconomic risks of budgeting – Method and value

Abstract

The legally mandated task of the State Audit Office of Hungary (hereinafter: SAO) is to form an opinion on the well-foundedness of the state budget proposal, and on the realisability of the revenue appropriations. In the past two decades or so the SAO has performed this annual activity on the basis of experience obtained during the audits conducted at organisations in charge of planning the budget appropriations. The audits first of all strive to determine whether the methods and procedures applied in planning, as well as the system of state tasks and the modifications thereof as proposed by the regulators lay proper foundations for the budget bill. When the SAO was required to form opinion on the 2008 budget, its activity was expanded with a new element: the Research and Development Institute of the SAO (hereinafter RDI) prepared an evaluating study on a few correlations of the macroeconomic foundations of the 2008 budget bill (hereinafter: first macro-study). The first macro-study provides a summary review and evaluation of the economic growth and budgetary processes, presents the risks inherent in the system of conditions of the budget bill, as well as the impacts of the planned measures in a few selected – key – areas. Due to the shortage of time and expert capacity, the RDI could perform risk and impact assessment analyses only in a few areas. However, by using novel analysis methods and approaches we attempted to establish a methodological framework that can be used in the activity of any independent institution assisting the budgeting process. The experiences related to the debate of the first macro-study showed that macroeconomic risk analysis can be an important, or even indispensable method for forming an opinion on the budget bill, by drawing the decision-makers' attention to (economic) correlations and critical points that jeopardise the attainment of the objectives set in the budget bill. At the same time, however, at this stage of budget preparation there is not enough time left to find less risky scripts; wherefore risks can primarily be mitigated by increasing explicit and implicit reserves. (By implicit reserve we mean the deliberate underplanning of revenues and/or the deliberate overplanning of expenditures.) Therefore, it is reasonable to start risk analysis already at an earlier stage of the budgeting process, when it is still possible to accept a less risky script, or mitigate the revealed risk factors. For this reason, in May 2008 the RDI prepared another evaluating study, this time about a few correlations of the macroeconomic scope of planning the 2009 budget (hereinafter: second macro-study), in which risk and impact analysis was performed in connection with factors that are most likely to influence the 2009 budget.