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The following OECD assessment and recommendations summarise Chapter 3 of the Economic survey of Hungary, published on 22 May 2007.
Sub-national government budgeting and financing needs to be improved
Municipal and county governments are responsible for a large share of public services so it is important that they have the motivation and the tools to make efficiency improvements and savings. Sub-national governments also initiate a large number of investment projects, and the much larger amounts of EU money now available for these activities means efficiency in the system for administering and co-ordinating development activities is critical.
Though sub-national governments are bound by tight rules to deliver balanced budgets, this does not guarantee either financing or spending efficiency. Indeed, budgeting in sub-national government lacks a longer-term perspective and there is plenty of room to increase accounting transparency and oversight. Furthermore, the whole system of financing is overly complex. The in-depth chapter on sub-national governments makes the following recommendations:
Budgeting. Stronger multi-year budgeting frameworks are needed. Also, separate budget balance rules for current and capital items ought to be considered. Multi-year budgeting could also be a vehicle for removal of the deficit grant by allowing temporary deficits.
Transparency and oversight. The mechanisms of account auditing ought to be widened to allow full oversight of sub-national government accounts. Oversight could also be strengthened by permitting audits by independent professionals. In addition, regulations should be introduced requiring local governments to re-submit sub-standard accounts and requiring that breaches of budget rules are accompanied by reports explaining the source of problems and plans for solving them. Finally, there should be greater transparency regarding off-budget items and increased monitoring of public procurement.
Benchmarking. Much faster progress is required in the development of comparable cost, output and performance indicators.
Complexity. The government must ensure it follows up on plans to reduce the number of formula based (i.e. normative) grants. However, the campaign to simplify the system ought to run much wider than this.
Specific tax issues. A broadening of property taxation is under discussion as part of reform on the local revenue system. This reform should also include removal of the local business tax. Local “value maps” ought to be developed to help ensure the property tax is based on market prices. In addition, steps are needed to eliminate problems in the system for allocating personal income tax revenues to municipalities. In particular, the link between these revenues and funding for specific areas should be cut.
Further measures are needed to motivate sub-national governments towards greater efficiency
Other channels need to be used to encourage spending efficiency in sub-national governments. A system with far fewer municipalities would be more efficient but constitutional and political barriers preclude such reform at the moment. In general, the governments of smaller communities are making a reasonable job of overcoming efficiency issues through joint provision arrangements and flexibility in the assignment of responsibilities between municipalities and counties. The following measures would improve the system further:
Though widespread merger between municipalities faces insurmountable barriers, efforts to achieve a consensus ought to be pursued regarding replacement of the nineteen county governments with elected assemblies in the seven NUTS II Regions.
The central-government’s system of financial encouragement for joint provision using “micro-regions” is welcome. However, stronger mechanisms for public comment on the decisions taken by councils of mayors that run these services should be considered to bolster local-government support for joint provision. Also welcome are the rules allowing municipalities to pass on responsibilities to counties. These would be more effective if municipalities were prevented from imposing rules on how the county runs the service.
Some central-government provision regulations should be scaled back because they are overly prescriptive – hampering rather than encouraging efficiency improvements in public services by sub-national governments.
Sub-national governments ought to be given more leeway in designing the work contracts of their employees and in setting wage levels. The type of reforms to the remuneration and management of civil-service employees envisaged at the central-government level should be adopted by sub-national governments.
International comparison of the average number of inhabitants per municipality
Source: Denmark, Ministry of the Interior and Health website; Dexia Bank.
Revenues of local governments by type
% of total revenue
Source: Ministry of Finance.
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.