# **4. MANAGING THE BUDGET AND FISCAL RISKS**

During the socialist era, public resources generally were allocated on the basis of multiyear economic plans rather than annual budgets. The principal function of the budget was to implement approved plans<sup>22</sup> , not to establish government policies and priorities. During the transformation of the Hungarian economy, central planning has been de-emphasized and budget decisions have become more prominent. During the first years of transition, the budget management system failed to secure aggregate fiscal control and even to provide information about the ways public moneys were spent.

Since 1996-1997 the government had strengthened the role and competence of the Ministry of Finance in economic and public management and established a modern Treasury equipped with advanced information and control systems. Since then the MOF has effectively taken the lead role in fiscal adjustment and the management of the central budget and off-budget government obligations; leading the process of annual budget allocation in coherence with macroeconomic forecasts, overall policy priorities and basic principles of fiscal prudence. The State Treasury has became responsible for budget execution, making all government payments from a single account, controlling ex-ante any such payment against budget appropriations, and recording them in the general ledger. Extrabudgetary funds (other than the social security funds) have been restored to the budget. These steps have limited the scope for overspending and misuse of government funds and-by keeping the cash centrally available at the single account and, thus, reducing public borrowing needs,-have improved the efficiency of government cash management.<sup>2 3</sup> Ahead of many European countries, Hungary has been expanding its budget management system to address contingent government liabilities. State budget proposal makes provisions for the main sources of potential financing pressure on the central government (such as individual guarantees or reinsurance extended to various agencies operating on behalf of government). The official 3-year fiscal forecast includes expected outlays on contingent government liabilities. State Debt Management Office reports the full list of state guarantees from a comprehensive database of public liabilities, and reviews the terms of new guarantee contracts. MOF submits to the Parliament reports on the potential cost of both newly considered and existing programs of contingent government support, and audited balance sheets of state-guaranteed agencies. The State Audit Office is authorized to review government activities under both direct spending and contingent support programs, the adequacy of budgetary provisions and reserve funds with respect to risk exposure, and the management of contingent as well as direct explicit liabilities. National Bank of Hungary has expanded its monitoring of potential fiscal risks in the private sector. In inter-government finance and the banking sector, regul-atory and

- 22 To a somewhat lesser extent than in other central European countries, but much more than in the OECD community.

- 23 For detailed discussion on budget management reforms see Bokros and Dethier, 1998.

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