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Hardening the budget constraint: Institutional reform in the financial management of Hungarian local governments

Author

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  • Tamás Vasvári

    (University of Pécs, Faculty of Business and Economics, Rákóczi út 80, Pécs, H-7622, Hungary)

Abstract

Kornai (2014) described the problems of municipal indebtedness in Hungary and analysed the process of bailout carried out between 2011 and 2014. In the same period, the central government also reformed the local government system, which included serious limitations of their financial independence. This study re-examines the state of the soft budget constraint (SBC) of Hungarian local governments. To start, the general theoretical framework of SBC is introduced. Then, the budget constraint on the Hungarian local governments before the bailout is described briefly, followed by an assessment of the corresponding measures which were expected to offset the negative messages of the completed bailout and to harden the budget constraint. The study concludes that the central government decided to harden the budget constraint through the introduction of new hierarchical mechanisms, while the development of fiscal discipline stopped. On the one hand, this resulted in the consolidation of municipal budgets, but on the other, it was accompanied by a serious limitation of local autonomy, projects and borrowing in general, while the central government employs specific administrative tools to show favour to some settlements according to its (political) interests.

Suggested Citation

  • Tamás Vasvári, 2020. "Hardening the budget constraint: Institutional reform in the financial management of Hungarian local governments," Acta Oeconomica, Akadémiai Kiadó, Hungary, vol. 70(4), pages 571-592, December.
    • Handle: RePEc:aka:aoecon:v:70:y:2020:i:4:p:571-592
    DOI: 10.1556/032.2020.00037
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    More about this item

    Keywords

    local government; soft budget constraint; bailout; fiscal discipline;
    All these keywords.

    JEL classification:

    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General
    • H7 - Public Economics - - State and Local Government; Intergovernmental Relations
    • H74 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Borrowing

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