Public finances in Hungary's transitional era: lessons from a year's study in the USA.

• Author: Peteri, Gabor

The public sector in Hungary cannot be financed in the future in the traditional ways, says a visiting scholar in the U.S. In American local government finance practice he finds some techniques and methods that might be adapted to help make a transition in his homeland.

Privatization of state-owned property and decentralization in the public sector are the two most important governmental issues in Eastern European countries, and both are critical to the future role of government. In these countries, where general government expenditures are more than two-thirds of gross domestic product (GDP), the central government has traditionally strong socioeconomic allocation and redistributive functions. In these circumstances, transformation of the state's role is not a simple, technical, fiscal reform step, because government penetrates many segments of life.

Political and constitutional transition during the last two years has not significantly changed the system of public finances or methods of public service delivery in these countries, where public-sector practices are deeply rooted in society and change is slow. As institution building in public finance needs a social consensus, the learning process needs to be receptive to many existing models. The Eastern European countries, coming from the traditional German, French or Scandinavian influence, have experienced less impact from the United States of America. Nonetheless, there are important lessons to be learned from American public finance. Summarized in this article are some principles and methods, mainly in the field of local finance, which the author has found possibly worth adapting to the newly emerging governmental systems of his homeland, Hungary.

National and Local Finances

In Hungary, central budget functions and social security spending account for 73 percent of general government expenditures; central budget and various off-budget funds use two-thirds of this money. Since central budget functions are mainly concerned with public services, only 20 percent of expenditures affect the economy through subsidies or investments. The reform process of the 1980s, when much of the state's economic intervention was eliminated, brought about changes to this economic stabilization and allocation function. Present debates revolve around further weakening of the role of the central administration.

Tax reforms in 1988 have changed the revenue structure of the central budget. After the introduction of a value added tax (VAT) and personal income tax, the earlier dominance of corporate taxes declined, but profit taxes and social security contributions (paid by the employer) are still regarded as high. Receipts from profit taxes and social security contributions are more than half of the tax revenues and 23 percent of GDP. In the U.S.A., these sources account for only 37 percent of total tax revenues and 11 percent of GDP. Personal income tax is only 16 percent of tax revenues in Hungary and 7 percent of GDP, while in the U.S., the ratios are 36 percent and 11 percent.

Despite the growth of a multi-party system and stronger influence of the parliament, the budget formulation process has changed little. Now, as in past decades, the central administration controls budgeting, leaving a limited scope of influence to committees, politicians or experts of parties in opposition. Parliamentary discussion of the central budget occurs during a one-month period, due to the pressure of having an accepted budget by the start of the fiscal year. Fiscal information systems and decision making are based on budget presentation by organizational units. Program budgeting is not used, although fiscal information...