Hungary needs independent institutions to enforce measures - Simor

"Over the past three years Hungary has undergone a classic emerging market crisis, while areas which had earlier been prime targets of such crises (e.g. Central or South America) were much less afflicted this time," Governor of the National Bank of Hungary András Simor said in his keynote speech at the Budapest Economic Forum. "The key reason for this is that the latter have successfully found a way to fix the procyclical nature of fiscal policy which had been the norm for several decades."

A common feature of emerging market crises is that the countries affected had accumulated significant external debt, the bulk of which was denominated in foreign currencies. Prior to the crisis, these countries followed a typically procyclical economic policy, with practically unlimited access to foreign capital. When a crisis hits such a country, the trend suddenly turns around and governments are unable to handle the situation. A lack of room for fiscal manoeuvre means fiscal measures are not available to help the country get out of the trough, Simor explained.

Hungary saw an increase in budget revenues prior to the crisis, while expenditure was on the rise, with a resulting increase in budget deficit. Meanwhile, the other V4 countries were experiencing mostly positive fiscal trends. During the crisis, Hungary was forced to reduce government spending and increase revenues, unlike some other countries which had more room for fiscal manoeuvre.

Simor attributed the relative success of Latin America in managing the crisis to significantly more room for fiscal policy manoeuvre. In contrast with earlier times of economic crisis, monetary policymakers in Latin America were able to implement interest rate cuts and weaken currencies as there was no threat of currency mismatch, he explained. Thanks to tight policy in the era preceding the current crisis, fiscal policy had access to measures and was capable of mitigating the impact, Simor added.


Hungary needs independent institutions and to abolish the procyclicality of fiscal policy

Hungary has undergone a classic emerging markets-type crisis in the past three years. This crisis affected Latin America a lot less than before, although these had generally suffered the worst hits.

One of the keys to success was to do away with the procyclicality of fiscal policy, Simor said.

Simor said one way to achieve that is to introduce fiscal rules that aim to keep in check not the budget deficit but the structural balance. But his is not enough, as governments tend to come up with unrealistic growth forecasts, on which they base their budget plans.

Hungary’s economic policy is procyclical. The quality of the key institutions determines how successfully a country can break away from this. Where the institutions are stronger, fiscal policy is more capable of reducing the impacts of the crisis, Simor said.

Meanwhile, capital markets strengthen procyclical policies, given that their behaviour is also procyclical and the behaviour of politicians also works in this direction. In such a situation one of the means to adopt is to separate powers and the appropriate fiscal institutions can also control the process. But this control needs to be aimed not at the budget deficit, but the cyclically adjusted, structural balance, Simor stressed.

As an example he mentioned Chile where they had introduced a structural budget rule they have been following ever since. Before the crisis the country accumulated massive surplus in the budget, which made it possible to pursue an anticyclical policy during the crisis. It helped to achieve results that forecasts on GDP and the price of copper were given not by the government, but by external experts and the budget plans were based on these figures.

Summing up his presentation Simor said doing away with the procyclicality of fiscal policy diminishes the fluctuations in business cycles, increases the manoeuvring room during a crisis, reduces the country’s vulnerability: enforcing measures necessary for success needs to be the responsibility of institutions that are independent from the government.

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