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Structural challenges towards the euro: fiscal policy

Listed author(s):
  • Gábor P. Kiss


    (Magyar Nemzeti Bank)

  • Péter Karádi


    (Magyar Nemzeti Bank, at the time of writing the study)

  • Judit Krekó


    (Magyar Nemzeti Bank)

Broad theoretical consensus and vast empirical evidence reinforce the view that prudent fiscal policy – also advocated by the fiscal institutions of the eurozone – can support the stable long term growth. After presenting some general principles of the optimal fiscal policy, the paper analyses the questions of fiscal convergence necessary for the successful eurozone entry and membership of Hungary. The paper calculates the consolidation necessary to reach the 2008 deficit target set by the Convergence Program. Taking into account of not only the level of the government debt but also the relatively progressed state of the interest rate convergence, the potential reduction attainable in the interest balance is moderate. The main result of the paper is that the necessary consolidation measures are required to reduce the primary balance by approximately 3 percent. In case of cutting public expenditure it would require approximately 4 percent reduction taking into account the revenue content of those expenditures. The structure of macroeconomic growth is not expected to facilitate fiscal consolidation – as wage and consumption growth, which have major influence on the development of relevant tax-bases, are expected to be moderate – and no improvements in the balance are expected as a result of the EU accession. International experience, especially fiscal consolidations of eurozone member states, however, show that structural – i.e. quality-improving and sustainable – measures and the reform of the institutional framework are essential determinants of successful consolidations. Temporary measures and deficit reductions by creative accounting do not foster macroeconomic stabilization and their eventual reversal is highly probable.

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Paper provided by Magyar Nemzeti Bank (Central Bank of Hungary) in its series MNB Background Studies (discontinued) with number 2005/1.

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Length: 61 pages
Date of creation: 2005
Handle: RePEc:mnb:backgr:2005/1
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