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Subnational Fiscal Consolidation: The Hungarian Path from Crisis to Fiscal Sustainability in Light of International Experiences

András Bethlendi and Csaba Lentner ()
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Csaba Lentner: Public Finance Research Institute, Faculty of Science of Public Governance and Administration, National University of Public Service, 1083 Budapest, Hungary

Sustainability, 2018, vol. 10, issue 9, 1-16

Abstract: The purpose of this study is to broaden the literature on the factors that contribute to the over-indebtedness of the subnational sector and the related crisis management tools based on the experience of Hungary. In addition to the phenomena known from the literature (vertical imbalance, the fiscal tightening of the central government, the weakness of central control and transparency, and local government-owned companies), non-standard factors also contributed to the evolution of a subnational fiscal crisis in Hungary. The Hungarian municipalities had, in practice, built up a carry trade position for speculative purposes, mostly from Swiss Franc funding. The other relevant observation based on experience is that, when significant amounts of central development funds fail to form a carefully considered development policy, over the long term they could undermine local fiscal stability. In addition to extraordinary fiscal transfer and full assignment of debts, the Hungarian subnational fiscal consolidation also involved a novel technique: the obligations were transferred to the state through the assumption of duties. In Hungary, in line with international experiences, central financial assistance was accompanied by increased fiscal control and by a tightening of the requirements for budgetary transparency and data reporting. Central approval for the assumption of new debts became an important element of fiscal sustainability. In addition to the above, this study argues that in political, social, and legal terms, credible no-bailout regimes do not offer an optimum solution for the subnational sector.

Keywords: public finance; subnational; sub-sovereign; municipalities; indebtedness; FX loans; fiscal crises; crises management; consolidation; carry trade (search for similar items in EconPapers)
JEL-codes: Q Q0 Q2 Q3 Q5 Q56 O13 (search for similar items in EconPapers)
Date: 2018
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