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The deficit mechanism of the Hungarian municipalities


  • Vasvári, Tamás


The management of the Hungarian municipal sector has received special attention since the crisis in 2008 and interest in the sector increased further due to the changes in legislation in 2011. A great number of economy experts and speakers on behalf of the government or the municipalities provided further details on prevailing issues in the municipal sector, however, their assessment of the severity of these issues varied greatly. By describing the logical framework of the deficit mechanism this study aims to evaluate the processes behind the situation of today in order to forecast the situation of tomorrow as regards the management of municipalities. According to the mechanism, if the deficit of a municipal budget (the operating, investment, financing budget or reserves) can only be eliminated by the upward adjustment of financing revenues, it will lead, in the end to increasing municipal indebtedness. Increasing indebtedness, as a rule, results in increasing debt service. Although these expenditures are part of the financing budget, in practice they are usually financed from other budgets. Therefore, increasing debt service can be a potential cause of reorganization in operation, the postponement of investments, an increasing asset disposal activity, refinancing with new borrowings or a drop in reserves. In addition to these, the phenomenon called the crowding out effect of debt service may at the same time improve the GFS balance of municipalities.

Suggested Citation

  • Vasvári, Tamás, 2012. "The deficit mechanism of the Hungarian municipalities," MPRA Paper 40357, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:40357

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    References listed on IDEAS

    1. Dániel Homolya & Gábor Szigel, 2008. "Lending to local governments: Risks and behaviour of Hungarian banks," MNB Bulletin (discontinued), Magyar Nemzeti Bank (Central Bank of Hungary), vol. 3(2), pages 20-29, September.
    2. Ákos Aczél & Dániel Homolya, 2011. "Risks of the indebtedness of the local government sector from the point of view of financial stability," MNB Bulletin (discontinued), Magyar Nemzeti Bank (Central Bank of Hungary), vol. 6(3), pages 7-14, October.
    3. Judit Páles & Dániel Homolya, 2011. "Developments in the costs of external funds of the Hungarian banking sector," MNB Bulletin (discontinued), Magyar Nemzeti Bank (Central Bank of Hungary), vol. 6(3), pages 61-69, October.
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    More about this item


    municipality; indebtedness; debt service; deficit-mechanism; crowd-out effect;

    JEL classification:

    • H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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