OVERVIEW OF FISCAL DECENTRALISATION
Hungary is a unitary state organised on a decentralised basis. It consists of three levels of governance: central, regional (counties) and around 3,200 municipalities. The intermediate layer (counties) has limited power over local affairs and municipalities are not subordinated to the counties. There are effectively two layers of public administration. Despite the average size of the municipalities being rather small, they enjoy a wide range of freedoms but, at the same time, an extensive range of mandatory services. For this reason, the main role of counties had been to bundle together some of the public services of small municipalities.
Legal acts governing fiscal decentralisation
The decentralisation process started with the adoption of the Law on Local-Self Government in 1990 by which local communes were given the right to self-government. In 2011 a new Law on Local Self-Governments was adopted, which has reduced the range of compulsory services by (re)centralising a certain number of competencies.
Qualifying fiscal decentralisation
Hungarian municipalities enjoy a wide range of competences and responsibilities. The small size of the municipalities, the large number of competences and a lack of relation between financial capacity and obligations has led to difficulties – the sale of municipal assets and local indebtedness. This apparent mismatch between the size of local units and their obligations in delivering public services makes the Hungarian system distinct from other unitary models. Some features, such as the “multi-purpose micro-regional associations”, were introduced to balance size and competences at the local level, but the situation has not yet been resolved.
Local governments enjoy a great deal of autonomy; however, the mix of local public services is characterised to a large extent by their financial ties with central funds. The intra-government financial system is complex without a clear relationship between different instruments and policy objectives. The 2012 amendment of the Act on Local Government has reduced the share of responsibilities of the municipalities, in particular for health and education.
In 2018, local expenditure as a percentage of total government expenditure reached 13%, a reduction from 2011 when the percentage was 24% due to the change in the local government act.
Source: authors’ elaboration on EUROSTAT data. For further details, see
methodology.
Fiscal equalisation mechanisms
The majority of the transfers from the central budget are provided as grants, a designed equalisation transfer and a mandatory deficit grant. Normative grants are allocated to narrowly specified functions, mostly in the fields of education, social protection and culture. These transfers are based on expenditure needs rather than on actual output. Such a system tends to discourage improving the efficiency or the quality of local public services. The equalisation grant has the function of assisting poorer regions. The mandatory deficit grant is designed to cover the deficits that the municipalities encounter through no fault on their own.
LEVEL OF FISCAL DECENTRALISATION
Revenue autonomy (own revenues relative to total resources available) of municipalities is frequently lower than the EU average. In 2018, it was 48% compared to an EU average of 53%. This is nonetheless a rise in revenue autonomy compared to 2011 when the local level saw rates at 30%. The relatively low autonomy results in a dependency on central government transfers. Local own revenues represented 6% of total government revenues, which was lower than the EU average (13%) in 2018. The timeline shows how the crisis hit the municipalities, increasing their transfer dependency from 67% in 2008 to 90% in 2013. The rate has since fallen to 51% in 2018.
Source: authors’ elaboration on EUROSTAT data. For further details, see
methodology.
The municipalities benefit from some tax autonomy but own source revenues are limited, with the rest coming from shared taxes and grants. Municipalities can levy local taxes, the most important of which is the business tax levied on gross corporate profit (80% of all local taxes). Local authorities can decide on the tax rate under a ceiling of 2%. A vehicle tax is also collected, but this only raises 7% of own-resource revenues, while a property tax levies another 7%. Other resources come from shared taxes, such as income taxes and grants. Overall, the rate of autonomy for taxes over which the local governments has restricted discretion is 95.7%.
Fiscal rules and borrowing capacity
Given the high degree of legal independence of local authorities, they are allowed to borrow from financial institutions or directly from the market. Furthermore, no golden rule exists; hence operational deficits have often been financed by borrowing or disinvestment (sales of assets). Consequently, assets in the local government had been declining while debt had been increasing throughout the past years. There is no national stability pact agreement between the central and the local levels. More strict rules came after the Economic Stability Act of 2011. Municipalities engaging in new financial liabilities are in general subject to authorisation by the central government. Loans can be taken out only for investment purposes and only if the debt redemption would not exceed 50% of own revenues in any given year during the maturity of the loan contract.
Deficit and debt at sub-national levels
Reflecting the developments noted in the previous section, between 2000 and 2010, the consolidated gross debt of the municipalities grew from 1.0% to 4.6%. The figure has since fallen back significantly to 0.5% in 2018. The net lending/net borrowing rate followed these developments with municipalities changing from being net borrowers to net lenders, while simultaneously cutting debt.
Source: authors’ elaboration on EUROSTAT data. For further details, see methodology.
EXPENDITURE BY GOVERNMENT LEVEL AND BY POLICY AREA
Expenditures of municipalities represent a significant part of total general government expenditures in the fields of housing and community amenities (60% in 2017) and environmental protection (55% in 2017). Education represented 56% in 2012 but it dropped to 27% in 2013 and further fell to 20% in 2017.
Source: authors’ elaboration on EUROSTAT data. For further details, see methodology.
In 2017, municipalities' spending was higher than the EU average in the fields of general public services (26%% of total local spending), economic affairs (19%) and recreation, culture and religion (12%).
Source: authors’ elaboration on EUROSTAT data. For further details, see
methodology.
