Economy 27 October 2011, 5:52pm

Romhányi: No such thing as fiscal policy in Hungary

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Speaking at the Budapest Economic Forum, Fiscal Accountability Institute CEO Balázs Romhányi censored Hungary's current and past economic policymakers for their apparent failure to think in terms of economic priorities which is reflected in the lack of trends in budget revenue and expenditure planning. Instead of having a vision and setting meaningful goals, governments in Hungary have been merely setting target figures and tried to meet them, Romhányi argued.

"The biggest problem with Hungary's fiscal policy is that there is no such a thing," CEO of the Fiscal Accountability Institute Balázs Romhányi observed.

"Based on a functional division of the budget, it becomes apparent that debt service between 1997 and 2002 declined from over 9% of GDP to below 5%, however at the same time social spending was permanently increasing.

In other functional areas, such as education or healthcare, such long-term trends are not visible," Romhányi pointed out. That is, the functional structure of spending did not consistently follow the priorities of each government.

In the 2012 budget, there is only one area (social care) where spending has changed by more than 0.3% of GDP (in this specific case, a spending cut), however this one exception is rather due to technical changes than to a change in policy lines.

On the revenue side, trends are hard to come by even within the same election cycle; in other words, changes to the tax regime did not follow consistent priorities either.

Another issue is that fiscal policymakers are ignoring the secondary impacts of budgeting (i.e. multiplicator impact, encouraging banks' lending activity, incentives to employment in the private sector).

In Romhányi's view, managing expectations is one of the greatest shortcomings of fiscal policy, with economic actors kept in a state of constant uncertainty as a result. For instance, the 2011 Maastricht balance remains shrouded in mystery, and how this can be derived from the pledges made in the convergence plan, he mentioned a case in point.

Romhányi claimed the use of reserves is completely lacks planning, the culture of self-restraint is generally missing. Neither is it clear how it will be possible to phase out the wage compensation system, which is causing huge uncertainties in employment.

The very essence of fiscal policy would be to meet government goals in a sustainable financial framework, rather than setting a balance target and making sure it is being met. Hungary's economic policy is still failing to utilize the available assets, Romhányi said.