Despite a deep recession in 2009 and weak growth in subsequent years, Hungary’s fiscal position compares favourably with many other OECD countries. Nonetheless, the underlying fiscal balance started deteriorating in 2010 and 2011. Recognising this, Hungary’s government launched an ambitious set of fiscal consolidation measures in spring 2011, the Széll Kálmán plan, which is rightly focused on curbing public expenditure. This plan, together with subsequent significant revenue-increasing measures, should help restore fiscal adjustment in 2012 and 2013. However, ensuring the sustainability of Hungarian public debt remains challenging in the context of the persistence of the sovereign debt crisis in many European economies since shifts in market sentiment could lead to unsustainable debt servicing costs. In this context, increasing the credibility of fiscal consolidation requires using several policy levers. First, the cost/risk assessment of the debt management strategy should be reassessed by taking into account lessons from the current crisis: the share of government borrowing in foreign currency will likely need to be drastically reduced. Second, additional consolidation efforts should focus more strongly on the spending side and avoid raising distortive taxes. Third, the fiscal framework should be improved by making fiscal rules less pro-cyclical and by raising the profile and political acceptance of the fiscal council through better analytical support and an enlarged mandate, while removing its power to veto the budget. This Working Paper relates to the 2012 OECD Economic Survey of Hungary (www.oecd.org/eco/surveys/hungary).
