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The following OECD assessment and recommendations summarise Chapter 2 of the Economic survey of Hungary, published on 22 May 2007.
Further development of disciplining mechanisms in the central-government budgeting process is needed
Several mechanisms helping budgetary discipline have been strengthened in 2007. Notably, reserve funds are larger and rules on state guarantees and spending on infrastructure have been tightened. Also, a new rule has been brought in requiring the annual budget submission to show a primary surplus. These are positive steps, and developments along these lines must continue. The primary-surplus rule should be augmented so that any windfalls are used for deficit and debt reduction. Other mechanisms ought to be considered as well. As previous Surveys have suggested, a system of binding medium-term spending limits may be one way forward. More assessment of budgetary plans by independent bodies should also be considered.
The spending freezes in public-sector pay perpetuate a stop-go cycle that eventually needs to be broken
The freeze on public-sector pay is playing an important role in the initial phase of fiscal consolidation but is already proving difficult to sustain. Agreement with the public-sector unions early this year led to 13th month salary payments being partially brought forward and additional payment in 2008 conditional on extra budgetary savings. The freeze is anyway perpetuating a stop-go cycle in public sector pay that has damaged morale and recruitment. In the longer term, the cycle should be stopped, for example through the multi-year agreements.
Some areas of public-expenditure reform should be strengthened further
The largest immediate savings via structural reform are coming from large cuts in the number of hospital beds, reduced spending on pharmaceuticals and lower household gas-price subsidies. All these are welcome measures, and indeed, have been recommended in previous Surveys. But the full range of public-expenditure reforms runs much wider than this. For instance, a general campaign to cut administrative overheads is underway. Central government introduced cuts in Ministries and formulated detailed plans for other centrally controlled bodies. It is important that this campaign extends to sub-national governments. Getting the counties and municipalities on board in the reform process is also important in other areas because these governments have responsibility and control of a large share of public services (see below).
Reforms in healthcare are encouraging
Healthcare reforms also include setting up a tiered system in which access to some types of care requires insurance coverage. There is also welcome wider application of user fees, notably a fee for doctor consultations has been introduced. In addition, changes to the hospital system are underway to bring a more structured organisation of specialist, general and outpatient services. Progress in these areas has so far been encouraging. At the same time, the authorities are moving cautiously with plans to introduce a system of multiple insurance providers. The following additional measures ought to be considered to help boost the effectiveness of reform:
The gate-keeping role of general practitioners should be strengthened to help prevent excessive referrals to specialist units in hospitals.
Hospital managers should be given greater flexibility and responsibility for deficits and debts.
Bad practices in transport financing have been halted
In a positive move, the 2007 budget has not assumed spending on motorways will go off-budget through a public-private partnership, unlike the previous two years. Indeed, the financial flows of both state-owned motorway constructions companies are now fully recorded in general-government accounts and a limit has been placed on the amount of debt they can accumulate. Also, there is a more rigorous approach to public-private partnerships, which will hopefully see an end to inadequate proposals aimed largely at getting spending off-budget and should be used as a vehicle for more private-sector participation. In rail transport, medium-term subsidy commitments have been made in an effort to insulate the state-owned rail company from a cycle of borrowing by the government. Also, large one-off capital injections are being made in 2007 and 2008 to help with a rationalisation programme, though there is a risk that the programme will not deliver all its promises.
More reform will be needed in education and pensions
In addition, several important reforms with longer-term payoffs are either being implemented or are in the pipeline, notably in education and pensions:
In education the various plans for rationalising services and altering financing arrangements look to be positive steps. In higher education, the widening application of tuition fees is welcome. Further reform should be made to reduce the connection between fees and examination results. A system where fees are more uniformly applied that builds on the existing system of government loans ought to be considered.
Several reforms are underway to raise the effective age of retirement. Further tightening of eligibility for early-retirement pensions is scheduled. Ultimately, the most popular early retirement scheme (the “advanced retirement pension”) ought to be removed altogether because there is no reduction in the annual pension while the “reduced advanced retirement pension” should be checked for actuarial fairness. In addition, reforms to the disability benefit system look set to pick up speed, notably with the planned introduction of a new benefit that is conditional on participation in rehabilitation programmes and changes in institutional arrangements for medical assessment. To further raise the effective age of retirement, the proposals for reform to the old-age pension system currently being developed should include increases in the statutory retirement age beyond 62 years.
Deficit and debt objectives under successive Convergence Programmes(1)
% of GDP
1. Figures show the ESA general government deficits and debts outlined in the Convergence Programmes. The official series in the Programmes for 2004 and 2005 included contributions to second-pillar pensions in revenues. This practice was abandoned in 2006; the imputed series enable comparison with the previous series.
Source: Convergence Programme of Hungary (various issues).
How to obtain this publication
The Policy Brief (pdf format) can be downloaded. It contains the OECD assessment and recommendations but not all of the charts included on the above pages.
The complete edition of the Economic survey of Hungary 2007 is available from:
For further information please contact the Hungary Desk at the OECD Economics Department at firstname.lastname@example.org. The OECD Secretariat's report was prepared by Philip Hemmings and Alessandro Goglio under the supervision of Andreas Wörgötter.