Hungary ROSC
I. Fiscal Transparency

Contents Executive Summary Introduction Description of Practice Clarity of Roles and Responsibilities Public Availability of Information Open Budget Preparation, Execution, and Reporting Independent Assurances of Integrity IMF Staff Commentary

Abbreviations and Acronyms
APF	Act on Public Finances
CSO	Central Statistical Organization
ESA95	European System of Accounts
EU	European Union
GCO	Government Control Office
GFS	Government Finance Statistics
MFB	Hungarian Development Bank
APV Rt	Hungarian Privatization and State Holding Company
HST	Hungarian State Treasury
FHB	Land Credit and Mortgage Bank
MTBF	Medium-Term Budget Framework
MOF	Ministry of Finance
NBH	National Bank of Hungary
NFPEs	Nonfinancial public enterprises
PFIs	Public financial institutions
SAO	State Audit Office
AKK	State Debt Management Agency

I. Introduction¹

1. This report provides an assessment of fiscal transparency practices in Hungary against the requirements of the IMF Code of Good Practices on Fiscal Transparency. The authorities have completed the fiscal transparency questionnaire prepared by the IMF staff. The assessment has two parts. The first part is a description of practice, prepared by the IMF staff on the basis of the questionnaire response and additional information provided by the authorities. The second part is an IMF staff commentary on fiscal transparency in Hungary.

II. Description of Practice

A. Clarity of Roles and Responsibilities

2. The boundary between general government and the rest of the economy is defined in law. There are clear laws defining the operation of budgetary institutions and commercial institutions with the primary law governing the public sector being the Act on Public Finances (APF). The definition of general government follows internationally accepted (GFS86) standards and encompasses the central government, social security funds (the health insurance and pension fund), two extrabudgetary accounts,² and local governments. The government is currently in the process of revising their statistics to be consistent with European System of Accounts (ESA95) and the revised Government Finance Statistics (GFS). There are, however, some inconsistencies in terms of incomplete coverage of nonprofit organizations that perform governmental functions³ and the exclusion of the Motorway Co. Ltd.⁴ and the Hungarian Privatization and State Holding Company (APV Rt)⁵ from the central government.

3. Responsibilities of different branches of government are clearly defined while those between levels of government are evolving. The constitution clearly defines the roles of the executive, legislative, and judicial branches of government. The 1990 Act on Local Government defines the responsibilities of local government and fiscal management responsibilities are now quite decentralized.⁶ The central government does not have direct control over local governments (made up of county and municipal level bodies), but exercises considerable leverage, through transfers and requires certain preconditions be met for local government borrowing.⁷ More than 50 percent of local budgetary institutions have significant own revenues but transfers constitute the majority of local government revenues.⁸ State disbursements to local government are made net of their contributions to social security and extrabudgetary fund contributions. The central government has, to date, maintained a strict `no bailout' policy with regard to regional authorities which limits the local government's ability to borrow (since such debts are perceived not to have an explicit or implicit central government guarantee). Bankruptcies of local governments are governed by the Law on Bankruptcy of Local Governments and involves various stages starting with appointment of a bankruptcy commissioner and ultimately ending in the sale of marketable assets to repay creditors.⁹ There are also county and regional development councils that are responsible for distributing regional development subsidies to lessen regional economic disparities.¹⁰

4. Some public financial institutions (PFIs)¹¹ and nonfinancial public enterprises (NFPEs) are required to undertake noncommercial activities on behalf of the state.¹² PFIs operate to support state infrastructure, agriculture, housing, foreign trade practices, and medical practices. Support for such noncommercial operations is provided either directly in the budget, by the APV Rt, or through the issuance of government guarantees. The complexity of some of these arrangements, however, makes them less than transparent in terms of assessing the overall impact on fiscal policy. The Hungarian Development Bank (MFB), for instance, is required by government resolution to participate in state infrastructure developments, financing of small- and medium-sized enterprises, and provide credit for newly-independent family doctors. In fulfilling the first of these tasks, the MFB provides financing for the Motorway Co. Ltd. The government, in turn, guarantees the credits assumed by the bank for road construction and is required, by government resolution, to provide a continuous capital injection to MFB which comes in part from the budget and in part from APV Rt. The noncommercial activities of some NFPEs are discussed further in paragraph 7 below.

5. Privatization operations are generally transparent and subject to scrutiny by the legislature, but some discretionary spending of privatization receipts is permitted. The APV Rt, created in 1995 as a corporation, acts as an agent of the government and is responsible for the management and control of the state's privatization program. Its activities are outside the Hungarian State Treasury (HST) and processed through separate bank accounts held at the National Bank of Hungary (although the HST can use deposits of the APV Rt for liquidity management purposes). The APV Rt is governed by a Supervisory Board that has a representative from the Prime Minister's office (although not from the MOF). Some of the expenditures of the agency are approved by parliament as an annex to the annual budget law¹³ and their execution is reported in an annex to the Report on the Fulfillment of the Annual Budget Law (although the detail of the expenditures are lacking). Other expenditures, covering various regulatory and contractual obligations, are not appropriated by the legislature but are regulated by the annual budget law and paid out of a special APV Rt reserve created for this purpose.¹⁴ This reserve is financed by explicit budgetary transfers to the APV Rt and by those privatization revenues which exceed the levels envisaged in the Budget Law. The government also has legal authorization to instruct the APV Rt to make capital transfers (for example to the MFB to fund Motorway Co. Ltd.) without prior parliamentary approval. Public reporting on state equity holdings is quite aggregated and it is unclear which valuation principle is used to quantify such holdings. The APV Rt also prepares quarterly reports to its Supervisory Board but these are not publicly available.

6. The NBH does not directly finance the government deficit although it has the legal authority to provide liquidity credits to the budget.¹⁵ The constitution and the Act on the National Bank of Hungary (as amended) legislate the independence of the NBH, which has established a good track record for monetary policy autonomy. The NBH is the account holder for the single treasury account covering all central budgetary institutions, extrabudgetary funds, and the social security funds as well as for the separate accounts of the APV Rt.

7. Government regulation of the nonbank private sector is implemented with clear simple regulations and an open regulatory process. Regulatory transparency has improved substantially in recent years and compares well to OECD standards of good practice. Outside of infrastructure and utilities there are few regulatory barriers to competition. However, transparency and accountability would be enhanced by improving the design and independence of sectoral regulators.¹⁶ In addition, regulation is sometimes used as a mechanism for quasi-fiscal activities such as price regulation of energy and telecommunications which provides implicit subsidies to consumers¹⁷ (although there have been recent efforts to rebalance tariffs to reflect costs).

8. Fiscal management is governed by a clear legal and administrative framework. The constitution identifies the responsibility of parliament to approve the budget and final accounts and defines the roles and duties of the State Audit Office. The APF is the organic budget law, which governs the budget process, covering both preparation and implementation,¹⁸ and was put in place in 1992 as one of the first measures to modernize the budget process. It conforms to European Union (EU) requirements for regulating budget management and provides for comprehensive coverage of central budgetary institutions, extrabudgetary funds, local budget, and the social security funds.¹⁹ The legal framework is aimed primarily at traditional financial compliance with no explicit emphasis on output or outcome reporting.

9. The APF delegates considerable authority to the government and to budget institutions to make decisions on expenditures, to conduct financial management within their budget limits, to utilize past years' surpluses,²⁰ and reallocate among budget items.²¹ Autonomous budget institutions (about half of the 1294 Central Budget Institutions and 60 percent of Local Budget Institutions) are able to use higher-than-forecast revenues to fund above-budget expenditure.²² Furthermore, additional expenditure appropriation authority can be approved at the time the Report on Fulfillment of the Annual Budget, or also by government resolution when revenues come in above budgeted levels.²³ The government, as sole shareholder, can also make decisions on allocating APV Rt resources for expenditure needs (for example in funding the Motorway Co. Ltd.). The annual budget contains a general reserve that can be appropriated by parliament within the range of 1/2 to 2 percent of total budgeted spending (APF, Article 26 (1)). In addition, specific reserves can be appropriated, though typically, the total of both reserves has fallen within the range prescribed.

10. All taxes have a clear legal basis. Taxpayers have ready access to information on tax laws and taxpayers rights through publications and the internet at http://www.apeh.hu. The government provides advice to taxpayers through 170 local offices, various publications, a free telephone service, and public seminars on tax topics of interest. Tax laws are applied uniformly across the country and tax incentives and preferences are provided on a nondiscretionary basis and fully specified in statute. Taxpayer officials are bound by a Code of Ethics as well as the Act on Civil Servants while taxpayer rights and obligations are specified in the Law on Tax Procedures (including a clear administrative appeals process and, if necessary, recourse to the civil court system).

11. The Act on Civil Servants regulates the rights, roles, and responsibilities of civil servants. The Minister of Interior has elaborated a draft Code of Ethical Norms for civil servants which is to be submitted to parliament with the revised Act on Civil Servants. The parliament has begun discussion of this Act and it is expected to be approved by mid-year.

B. Public Availability of Information

12. Budget documents provide a comprehensive coverage of general government with the biennial budget providing detailed information on the general government and each of its subcomponents (with both a functional and economic classification) for the two preceding years, the two budget years, and an indicative projection for the following third year. In the case of local governments, only the subsidies transferred by the central government budget are subject to parliamentary approval, but complete information on local budgets and outcomes is presented for information. The final report contains an analysis detailing any deviation between the budget and the actual outturn and identifying the effect of changes in the macroeconomic environment, forecast errors, and policy changes during the budget year. Budget details are available through the finance ministry website at http://www.meh.hu.

13. The government adheres to its public commitment to produce regular fiscal reports.²⁴ Hungary subscribes to the SDDS and complies with its requirement to produce advance release date calendars. Monthly reports on the fiscal situation of central government, including the social security fund and the two extrabudgetary accounts (the data is not however consolidated) is available in English (within 30 days after month-end) on the website http://www.meh.hu and in the monthly journal of the MOF (Pėnzügyi Szemle); such reports contain statistics and an analysis of the major developments in the budget. Fiscal balances are also published monthly by the Central Statistical Organization (CSO) in its Monthly Bulletin. Annual data on the consolidated general government is available with a lag of six months although the underlying data does not provide sufficient information to fully net out transactions between levels of government. In addition, due to timing and definitional differences, financing information from the monetary accounts does not reconcile with the overall budgetary position. There is no reporting of information on budget outputs and outcomes.

14. Budget documents include statements on government guarantees and a budget provision is made for calls on guarantees. Under the APF, the government is required to provide the legislature, in the Report on the Fulfillment of the Annual Budget, with details of guarantees issued, the legal authority for providing such guarantees, and any payments related to calls on such guarantees. Guarantees²⁵ are bound by an overall limit set by the legislature in the annual budget law²⁶ and by individual ceilings for certain PFIs; guarantees issued above this limit must be explicitly approved by parliament prior to issuance. The annual budget law also makes provision each year, based on unpublished sectoral risk analyses, for expected payments on guarantees called. The government may charge the borrower up to 0.5 percent of the guaranteed amount (but is authorized to dispense with the fee) and issuance of all guarantees is required to be reported case by case to the State Audit Office (SAO).

15. The report on the budget outturn provides partial information on tax expenditures and on quasi-fiscal activities. Information is made available in the Final Report on Fulfillment of the Budget on exemptions under the personal or corporate income tax laws insofar as they can be quantified. The size of indirect income tax exemptions are not reported however. Some fiscal activities of enterprises are covered by direct appropriations from the budget (e.g., transfer to transport companies to cover discounts on tickets for various social groups or interest subsidies to the FHB), but quasi-fiscal activities of the government are not comprehensively reported in budget documents. The MOF also compiles periodic reports in the context of the EU accession process that document various forms of state aid,²⁷ including tax expenditures, granted by the central government.

16. The central government debt statistics are regularly reported. The State Debt Management Agency (AKK) has, since March 1, 2001, been created as an independent agency under company law with 100 percent state ownership.²⁸ Its monthly publication Government Securities Market and website http://www.akk.hu provides detailed quarterly data within 50 days of the end of the quarter on the stock of central government domestic debt (categorized by financing purpose, financial instrument, and maturity) and on interest payments. In addition, there is a clear and publicly available timetable and terms and conditions for prospective domestic debt auctions. Quarterly data are released on outstanding foreign debt classified by original maturity and by currency and is available in NBH publications and on its website at http://www.mnb.hu. Partial data on the assets and liabilities of the central government are included in the final accounts but information on net debt is not available.

17. There is incomplete reporting of government equity holdings. The government holds shares through APV Rt in various corporations which are comprehensively reported annually in the APV Rt report (although in aggregate form and with an unclear valuation methodology). In addition, certain sectoral ministries hold equity in private companies but reliable reporting on these holdings are not yet in place. Although an improved reporting system aimed at providing quarterly data on all equity holdings of the government was introduced by the MOF in 2000, this has not yet been effectively implemented.

C. Open Budget Preparation, Execution, and Reporting

18. The budget preparation process is open and clearly documented. The budget process in Hungary has been substantially reformed over the past decade and largely conforms to EU standards. The budget is on a calendar-year basis and its timetable is well established. From 1999, the timetable has incorporated the elements of a medium-term budget framework. In the first step of the process, Medium-term Budget Guidelines are approved by the cabinet and adopted by the government through a parliamentary resolution in mid-year. The guidelines define the broad targets of fiscal policy and the resolution approves the deficit and the level of government expenditure relative to GDP. On the basis of the guidelines and government resolution, ministries and state organs prepare their budget requests and submit them to the MOF. After negotiation and cabinet approval, the budget is submitted to parliament by September 30 and a background fiscal and economic policy paper, the Three-year Prognosis, as well as volumes on detailed budgets of line ministries are submitted in mid-October. The main fiscal aggregates and budget details are normally finalized by end-November. After that interim vote process, the APF provides for continuation of budget debate and allows amendments that do not change the targets or total revenue and expenditure figures for each chapter. Final voting is due by late-December. If there is no approved budget by January 1, the APF provides for continuation of government business at the same nominal level as authorized by the previous budget law.

19. The government has recently put in place a system of two-year budgeting and multi-year planning which are intended to be a permanent feature of fiscal management.²⁹ These two-year plans apply to the central government, social security funds, and the two extrabudgetary funds. In addition the government is encouraging local governments to prepare two-year budgets. The two-year budget essentially strengthens the role of the medium-term budget framework (MTBF) by making the second year of the MTBF projections into actual appropriations (rather than simply technical projections) and thus allows the government to return to parliament only every other year for budgetary approval. However, the biennial budget continues to provide a separate appropriation for each year and the government is required to submit final reports after the end of each calendar year. The APF also provides discretion to the government to submit a supplementary budget at any time during the two-year period should there be significant deviations in the macro-fiscal outlook.³⁰

20. Clear fiscal targets are set, but the forward estimates process is still developing particularly outside of the central government. The guidelines and the three-year forecasts incorporated in the Prognosis give a clear indication of the government's intentions with regard to the overall balance and facilitate parliamentary and public discussion of fiscal policy (including that of the extrabudgetary and social security funds). Under the biennial budget the second year of the projection has become a legal appropriation rather than a statement of intentions. The overall balance, the primary balance, and government gross debt as ratios to GDP are used as the primary indicators of fiscal policy stance. There is some distinction between existing and new policies in the budget preparation, but this is not formalized as a baseline "existing policy" forecast in the budget documents presented to parliament. Budget information and targets for the APV Rt and for local budgets³¹ is weaker than that for central budgetary institutions.

21. A quantitative analysis of fiscal risks is not included in the budget documents. In the context of the medium-term budget framework, the authorities do explore alternative budget scenarios and provide a general explanation of fiscal risks in the supporting documents. They also publish data on likely calls on government guarantees. As yet, however, there is no publication of a quantitative analysis of sensitivity to changes in economic assumptions or the effects of other calculable fiscal risks on the budget outcome (although internally MOF does prepare such analysis).

22. Some studies of fiscal sustainability have been undertaken in the context of the medium-term budget framework. In annual budget documents and in the context of the MTBF projections for domestic and external indebtedness are made for three years ahead. The government also recently undertook, in the context of pension reform, projections for the pension fund over a fifty year horizon including an analysis of the fiscal impact of demographic change.

23. Aggregate fiscal targets are carefully monitored. The authorities comply with the requirements of the APF to present the final accounts—for the central government, social security funds, extrabudgetary funds, and local budgets—to parliament within eight months of year-end (requiring presentation to the SAO within 6 months). During the year, the MOF publishes monthly budget monitoring reports (covering the central government, social security, and extrabudgetary funds) within one month of month-end and sends these reports to the SAO, the Government Control Office (GCO), and various parliamentary committees. From 1992 to 1998, the government was required under the APF to present a mid-year report to parliament; this obligation was removed in 1998 since detailed monthly reports are readily available. Under the biennial budget the requirement for annual reports will be retained.

24. Budget data is classified in a way that facilitates policy analysis and promotes accountability. The current accounting system is somewhere between a modified cashflow and modified accrual based system although budget preparation and reporting is done on a strict cashflow basis in line with GFS86. The authorities are currently making preparations to reclassify fiscal data in line with ESA95 guidelines.³² The annual budget and final accounts contain no statement of accounting basis although the cashflow accounting basis is clearly specified in the APF.

25. Internal management controls are open and effective. Internal management and controls have been greatly enhanced in recent years by the creation of the HST, which controls all disbursements against authorization by the central budget, the extrabudgetary funds, and the social security funds. The HST is responsible for ex ante control and overall supervision of the process of appropriation control.³³ The GCO, which operates under the direction of the prime minister's office,³⁴ is responsible for internal audit and control. The GCO investigates the impact of expenditure or revenue collection, financial controls, and the management of budgetary institutions and the extrabudgetary funds, including the use and management of public funds given through public foundations, county and regional development councils, and nongovernmental organizations. It also reviews the effectiveness of controls at any level including ministries' internal control units and the systems and methodologies of the HST. Each budgetary organization has its own internal control unit responsible for ensuring effective control (mainly ex post) and monitoring of the effectiveness of control systems. Some organizations, most notably APV Rt and Motorway Co. Ltd., are outside of the Treasury and keep their own accounts either in NBH or in commercial banks.

26. Laws governing public procurement and employment are in place and effectively managed. Public procurement is governed by the Act on Public Procurement of 1995 which conforms to World Bank and UNCITRAL Model Law guidelines. Amendments are planned for 2002 to make the law fully compatible with the EU Public Procurement Directive. Procurement is managed by the Public Procurement Council³⁵ and subject to investigation by the SAO. However, concerns have been raised over the transparency of government procurement in practice.³⁶ In addition, laws on public procurement do not apply to the NFPEs and agencies such as the Motorway Co. Ltd.³⁷

D. Independent Assurances of Integrity

27. An independent professional agency is responsible for reviewing fiscal management. A SAO³⁸ is prescribed under Article 32 of the constitution. The Act on the State Audit Office of 1989 sets out the authority and duties of the SAO. It is subject only to the parliament and its governing laws. The chairman and two vice-chairmen of the SAO are elected for 12 years by parliament (and may only be removed in the face of professional misconduct or conflict of interest) while changes to the SAO budget appropriations can only be made with parliamentary approval. Ex post audit by the SAO covers the final accounts of the central government as well as the extrabudgetary funds, the social security funds,³⁹ and the use of state transfers by local governments. However, due to the extensive number of local government bodies, oversight and control at the local level is weaker than for the central budget. As well as ex post audit of government accounts, the SAO is required to report to parliament on the reasonableness of government budget estimates, the soundness of budget and supplementary budget proposals, the feasibility of the revenue forecasts, and the lawfulness and need for revenue measures and borrowing to finance expenditures. All reports of the SAO, except a limited number containing state secrets, are publicly available. In the event of irregularities, the SAO has a number of administrative remedies available to it and can also forward cases to public prosecutors for criminal investigation.⁴⁰ The SAO primarily conducts financial compliance audits but does conduct a limited number of performance audits.

28. Macroeconomic assumptions are open to limited external scrutiny. The budget documents give details on the main assumptions made for macroeconomic and fiscal forecasts and, as noted, the basis for the budget is subject to scrutiny by the SAO. The models and working assumptions (such as, for example, elasticities used to calculate revenue projections) are not available publicly although are not regarded by the MOF as confidential. As part of the monthly reports on budget outturns assessments of the macro-fiscal forecasts are presented and there are active discussions with various nongovernmental think tanks and academics on the governments forecasts.

29. The national statistics office is given legislative assurance of independence. The Act on Statistics of 1993 gives the CSO technical independence for the compilation of national statistics. The president and deputy president of the CSO are appointed by the prime minister for six years with possibility of renewal for a second term. Hungary's fulfillment of the IMF SDDS requirements provides further assurance of statistical integrity.

III. IMF Staff Commentary

30. Hungary has made significant progress in increasing the transparency and accountability of government in recent years and meets many of the requirements of the Code of Good Practices on Fiscal Transparency. The activities of the fiscal authorities are clearly spelled out in the APF which conforms to EU requirements for regulating budget management. The number of extrabudgetary funds has also been reduced significantly (from 29 in 1995 to the current 2). There are effective internal and independent external audit controls which provide assurance to the public on the quality of the information provided by the government.

31. Thanks to recent reforms, Hungary has a modern and well-working budget process that has comprehensive coverage (over the central government as well as the extrabudgetary and social security funds) and is couched in a well-articulated medium-term economic framework. Fiscal data are reported, both in Hungarian and English, in a form which adheres to internationally recognized standards and in a manner that allows the public easy access on a timely basis.

32. There are some areas where fiscal transparency could be improved and the remainder of this assessment provides constructive suggestions to bring Hungary fully into line with the Code of Good Practices on Fiscal Transparency.

33. Significant fiscal activities are still conducted outside the purview of the MOF. In particular, the APV Rt has considerable independence and autonomy and its reporting requirements are less stringent than those of the rest of the public sector. It is a welcome development that the government is currently reconsidering the functions and institutional structure of the APV Rt. In such a reform the government should ensure that the activities of the APV Rt and its relations to the budget are made more transparent. There are a number of options:

• At a minimum the government should present (in its budget, the monthly reports, and the final annual reports on the central government) a consolidated presentation that would include all activities of the APV Rt. This would imply having gross privatization receipts (rather than the dividends paid to the budget) included as budget financing and all expenditures of the APV Rt (such as capital transfers to rehabilitate public companies, transfers to the MFB and Motorway Co. Ltd., and contractual and regulatory obligations) included as central government spending. The practice of having the APV Rt budget approved as a separate annex to the state budget could continue but it would be important that, in all budget documents, the consolidated picture is presented both to the legislature and the public.

• Consideration could also be given to restructuring the arrangements between the budget and the APV Rt. This would imply bringing the fiscal activities of the APV Rt fully into the central government budget, with the same HST control and GCO oversight as all other budget institutions. All gross proceeds from privatization would be deposited in the HST, all expenditures from these proceeds would be in the biennial budget approved by the legislature, and there would be monthly reporting on the activities of the APV Rt in line with the reporting currently done by other governmental agencies.

Whichever approach is taken, it would be desirable to eliminate the special reserve fund (financed by APV Rt transfers and those privatization revenues in excess of levels envisaged in the Budget Law) in order that the parliament decides on all expenditure allocations made from privatization receipts (including those arising from contractual or regulatory obligations). This is discussed further in paragraph 34.

34. The activities of the Motorway Co. Ltd. and those nonprofit institutions that conduct essentially fiscal activities should be incorporated into the central government. These institutions should also be brought into the HST and their expenditures subsumed into the central government budget. In addition, the Motorway Co. Ltd. should be financed directly from the budget and the circuitous flow of funds through APV and the MFB should be discontinued. Those nonprofit institutions that conduct essentially private sector activities under contract to spending ministries could be eliminated with the public services they provide being outsourced to the private sector.

35. The current legal framework, which gives the government substantial scope to reallocate spending and raise spending above budgeted levels, does not conform to international best practice. In order to ensure the universality of the budget as the principal instrument of fiscal control, all government spending should be authorized in the budget or, if necessary, by passage of a supplementary budget by the parliament. The practice of allowing the government, through government resolution, to conduct additional policy spending from higher-than-forecast revenues should be discontinued. Spending by autonomous budget institutions that is in excess of their budget appropriations should be subject to review by parliament by way of supplementary appropriations requests submitted by the MOF (rather than the current system where authorization is provided by responsible line ministries). In addition, if it were decided to keep the APV Rt outside of the central government budget (see paragraph 32), all spending by the APV Rt from privatization proceeds should also be approved ex ante by parliament.

36. To better measure the true fiscal activities of the government the authorities should prepare comprehensive reports on all quasi fiscal activities including those conducted by the PFIs and NFPEs and those arising from the government's regulatory role. A comprehensive report of quasi-fiscal activities should bring together all aspects of state support and identify the final recipient of such support. The current report of the state aid monitoring office combined with the inclusion in the budget of PFI guarantees and various transfers to PFIs and NFPEs should provide a good basis for compiling such a report. Such a report would also include the implicit subsidy contained in the provision of noncommercial services by the NFPEs (such as charging below-market prices for specific goods and services), the implicit subsidies resulting from the government's regulatory activities, and any indirect governmental support such as that provided by the MFB. A preferred solution, however, given the difficulty in measuring such quasi-fiscal activities, would be to fiscalize such activities and convert any implicit subsidies into explicit transfers from the budget and avoid using the government's regulatory authority for public policy purposes.

37. Consideration should be given to moving towards performance or output-oriented budgeting. Such a practice would represent a move toward best practice of OECD countries, where performance budgeting is increasingly recognized as being important in increasing the transparency of policy choices made in government budgets. Following a government resolution on the modernization of public finances, the MOF has already made preliminary steps in this direction and these should be encouraged. This would involve:

• clearly specifying the government's budget objectives in terms of outcome targets that can be assessed ex post rather than solely expressing budget goals in terms of the line item expenditure appropriations;

• begin reporting on selected indicators of budget outcomes (e.g., the numbers of hospital beds available, levels of childhood vaccinations, etc.) in order to evaluate ex post the government's stated goals; and

• expand the SAO's mandate to the conduct of performance or value-for-money audits to complement the current focus on the financial compliance of budgetary agencies.

38. There are a few areas in fiscal reporting that could usefully be enhanced. The analysis contained in the fiscal documentation should be expanded to include:

• a comprehensive quantitative analysis of fiscal risks to permit those outside government to better assess the likely impact on the fiscal outturn of exogenous shocks to the economic assumptions underlying the budget. This will become even more important with the new two-year budget horizon since forecasts over that two-year period are necessarily more uncertain than they would be under an annual budget;

• tax expenditure reporting should be expanded to include a quantification of the size of revenue foregone from all statutory tax concessions and also to provide summary information on who are the primary recipients of such indirect government subsidies;

• a comprehensive reporting system on the value of the financial assets of the state; which is under development by the MOF, should be put in place to collate and publish quarterly data on the size and value of all state holdings of equity and other financial assets in order to produce data on the level of net debt; and

• the budget documents could usefully contain a statement of the accounting basis, particularly given the changes likely to occur in this area in the next few years.

39. Finally, a number of other improvements are also recommended.

• The government should consider putting into the public domain the macroeconomic models, working methods, and underlying assumptions that are used to produce macro-fiscal forecasts in order to increase public knowledge and debate over the assumptions underlying the medium-term economic framework.

• The government should ensure that the current rules for public procurement are strictly adhered to at all levels of government. It is a welcome development, therefore, that the SAO is currently undertaking a comprehensive review of public procurement.

Hungary ROSC