public finances in hungary's new constitution - the debt brake

181

Revue Est Europa, numéro spécial 1, 2012

Public Finances

in Hungary’s New Constitution – the Debt Brake 1

Várnay ERNŐ *

In the spirit of balanced, transparent and sustainable public finances, the new chapter on public finances in the new Hungarian constitution (the Fundamental Law) has introduced a debt ‘brake’. When voting on and executing the budget, Parliament and the government have to respect an upper ceiling of public debt fixed at 50% of GDP. The vote on the budget requires the assent of the independent Budget Council. Since the powers of the State Audit Office (Court of Auditors) and the Budget Council are determined in a somewhat contradictory manner in the Fundamental Law, fail to reflect rule based fiscal policy considerations and the requirements emerging from the European Union in this field, and fail to provide constitutional foundations for multi annual financial planning and macroeconomic forecasts, the ‘cardinal laws’ to be passed following the provisions of the Fundamental Law would need to remedy these systemic shortcomings. The weakening of the powers of the Constitutional Court in the area of public finances, evident in delimiting its powers to conducting judicial review only while public debt remains above the constitutional ceiling, is unnecessarily damaging to the principle of the rule of law.

1 This article is based on the contribution made by the author at the conference “Economic policy and public finance regulatory methods of avoiding the debt trap” Academy of Sciences, Budapest. 11 May 2011: An earlier version has been published in Hungarian in Jogtudományi Közlöny No 10. 2011. pp. 483-495.

* Professor of Law University of Debrecen (Hungary).

Várnay ERNŐ *

182


I. Introduction

One of the shortcomings of the Hungarian Constitution of 19492 is that it only dealt with certain aspects of the “constitution of the public finances”.

The new constitution – the Fundamental Law of Hungary – wishes to correct this. At the same time it includes a new chapter entitled: “Public finances”. In order to decrease the public debt and to maintain it below a determined level the new chapter stipulates the so called debt brake. The objective of this paper is to give a concise presentation of the new provisions on public finances in the new constitution and make some early comments on them. It does not aim to provide a systematic discussion of constitutionalism in the sphere of the public finances in Hungary.

II. Provisions on public finances in the constitutional law based on the Constitution of 1949

There are several provisions related to public finances in the Constitution of 1949.In accordance with the tradition dating back to 1868 it provides for the right of the

parliament to vote into law the general budget and the discharge of the Government for the implementation of the budget. Concerning the “stock” dimension of public finances it states that State property is “national property” (while this notion does not have any particular legal meaning or consequence). The State owned companies are managed independently albeit they must comply with the law and they are made accountable by law.

The democratic principles of representation, specification, transparency, accountability, the rule of annuality, the rule of universality and the insertion into the European Union budgetary system were introduced by the Act XXXVIII of 1992 on Public Finance. This act was voted by simple majority in the parliament and modified a great number of times. We consider that some of its provisions would have been incorporated into the constitution while a number of provisions would have been governed by regulations (i.e. by government or ministerial decree).

The constitution includes the basic rules concerning the legal status of the State Audit Office (SAO) and the National Bank of Hungary which is under the financial-economic control organ of the Parliament. Its tasks referred to in the Constitution are numerous, including monitoring the soundness of the Draft Budget, the legality and the appropriateness of expenditures, the management of State property, and Government accounts regarding the implementation of the budget etc.

2 Act XX of 1949: the Constitution of the Republic of Hungary. The Stalinist constitution adopted in 1949 was transformed into a constitution respecting democracy and the rule of law in line with the transformation of the political system of Hungary into a modern democracy in the years 1998-2001. For detailed analysis of the legal transformation see András Jakab, Péter Takács, Allan F. Tatham (ed.), The Transformation of the Hungarian Legal Order 1985-2005. Kluwer Law International, 2007.

Public Finances in Hungary’s New Constitution – the Debt Brake

183


The SAO carries out its audits from the points of view of legality, regularity and efficiency, and submits its reports to Parliament. These reports have to be published. The SAO is a legally independent, autonomous organ which can only be instructed by the Parliament to carry out a particular investigation. It is not responsible to anyone, including the Parliament. The guarantees of financial and personal independence are given in the “Cardinal Act” based on the Constitution.

Some of the powers mentioned in the constitution had never been used by the SAO. It did not control the borrowings of the general budget and had never examined ex ante the legality of the execution of the budget.

The provisions related to the National Bank of Hungary (NBH) are very few in number in the Constitution. The NBH is the central bank of Hungary and is accountable for monetary policy according to the law. In order to guarantee personal independence, the president of the bank is nominated for six years by the President of the Republic. Every year the president submits – without any particular consequence - a report on the activities of the Bank to parliament.

The act relating to the HNB defines the bank as the member of the European System of Central Banks. The primary objective of monetary policy is to attain and maintain price stability. The act includes the guarantees of the financial, personal and institutional independence of the NBH.

The democratic principle of the obligation to contribute to public expenditures is formulated as follows:

“(1) Every natural and legal person and organization without legal per-

sonality shall have the obligation to contribute to public revenues in

accordance with their income and wealth.”3

The public finances of local authorities are placed in the framework of the local government.

(1) The local representative body:

(a) shall independently regulate and administrate the affairs of local

government; its decisions may only be reviewed on the grounds of

legality;

(b) shall exercise the rights of ownership in respect of the pro-

perty of the local authority, independently manage local govern-

ment revenues, and may undertake entrepreneurial activities at its

own liability;

(c) shall be entitled to its own revenues appropriate for perfor-

ming the duties of local government as prescribed by statute, and

shall furthermore be entitled to state support commensurate to the

scope of such tasks;

3 Article 70/I (1) of the Constitution of 1949.

Várnay ERNŐ *

184


(d) shall determine the types and rates of local taxes within the

framework established by statute.”4

III. Public Finances in the Fundamental Law

A. Why a special chapter?

It is a legal fact that a number of elements of a possible “financial constitution” – for example the principle of sound financial management, the principles of taxation, the procedural rules for adopting and implementing the budget, and fiscal policy rules - were lacking in the 1949 Constitution. However, as we have seen previously most of the democratic principles were introduced into state finances by ordinary acts of parliament and the Constitutional Court’s interpretations also contributed to the establishment and effectiveness of these principles.

It is also a fact that in the majority of the constitutions of the EU Member States one can find a chapter devoted to the public finances.

In the course of the preparation of the new constitution there was a consensus about the need to fill this “gap”.

In our view there is no imperative reason which could justify a special chapter devoted to the public finance or “financial constitution” in a written constitution. What really counts is rather a social contract between the citizens and their government about making available and financing public goods, the maintenance of social cohesion, and solidarity by constraint in case of sickness and old age. If the fundamental questions of this contract can find their place in the constitution this may serve as a basis for the legal existence of this contract.

B. Public Finances in the Fundamental Law

On 25 April 2011 the Hungarian Parliament adopted the Basic Law of Hungary. The entry into force of the new constitution is 1st January 2012.5

At the beginning of the Fundamental Law we can read the “national avowal”, then the “Foundation” (Articles A-T). The next section is called “Freedom and responsibility” (Articles I-XXXI) and is followed by the final section “The state” (Articles 1-54).

4 Article 44 A of the Constitution of 1949.5 Published in the Official Gazette “Magyar Közlöny” on 25th April 2011 No. 43, p. 10565. The official

English version is available at: http://www.kormany.hu/download/2/ab/30000/Alap_angol.pdf. http://www.kormany.hu/download/4/c3/30000/THE%20FUNDAMENTAL%20LAW%20

OF%20HUNGARY.pdf.


185


Reading together the provisions related to the public finances in the Fundamental Law one can conclude that there is a “financial constitution” contained within it.

Article N of the “Foundation” reads:

“(1) Hungary shall enforce the principle of balanced, transparent and

sustainable budget management.

(2) Parliament and the Government shall have primary responsibility

for the enforcement of the principle set out in Paragraph (1).

(3) In the course of performing their duties, the Constitutional Court,

courts, local governments and other state organs shall be obliged to

respect the principle set out in Paragraph (1).”

We should indeed welcome the placing of the principle of balanced and sustainable public management at the highest level of the legal system. In modern parliamentary democracies it is evident that the parliament and the government are accountable for these principles. It is also understandable that the local governments and the “other state organs are also responsible for the respect of this principle. It far more difficult to see under what kind of obligation the Constitutional Court and the ordinary courts are placed, according to paragraphs 1) and 3) of Article N. Could we ask – perhaps with inexcusable cynicism – whether “if you can’t afford democracy and the rule of law then just don’t do it”? The primary duty of the Constitutional Court is to defend the Constitution, while the ordinary courts’ duty is to interpret and apply the law. If this is so, it seems to be questionable to impose this not very clearly defined burden of sound financial management on the courts.

The duty to contribute to the public expenditures is laid down in Article 0 of the Foundation “Every person shall be responsible for him or herself, and shall be obliged to contribute to the performance of state and community tasks to the best of his or her abilities and potential.” The Article XXX of the part “Freedom and responsibility” almost repeats this:

“(1) Every person shall contribute to satisfying community needs to the

best of his or her capabilities and in proportion to his or her participa-

tion in the economy.

(2) For persons raising children, the extent of contribution to satisfying

community needs shall be determined in consideration of the costs of

raising children.”

Amongst the provisions devoted to the State we can find the new chapter called “Public finances” (Articles 36-44)

The chapter provides for the general principles of public financial management: the budgetary annuality, the transparency, the speciality and the requirements of expediency, legality and efficiency of financial management. Article 36 lays down the basic rules of the annual budgetary procedure, the properties of the State and the local governments, the debt brake, the State Audit Office, the Hungarian National

Várnay ERNŐ *

186


Bank and the Budget Council. The provisions on the body supervising the system of financial mediation will be defined by a cardinal Act.6

We should be happy with the inclusion of the principle of the transparency and very disappointed about the omission of the principle of unity. The effectiveness of the principle of transparency is also promoted by the provisions of the Article 36 (2): “All bills on the State Budget and its implementation shall contain all state expenditures and revenues in the same structure, in a transparent manner and in reasonable detail.”7 The Article 38 paragraph (4) can also contribute to the effective functioning of this principle:

“Agreements on the transfer or utilisation of national assets shall only

be concluded with any organisation which has a transparent ownership

structure, organisation and activity aimed to manage the national assets

transferred or assigned for utilisation.”8

We can find the principle of unity in the preamble to the Act on public finance in force. The importance of this principle was underlined by the president of the State Audit Office in his letter to the ad hoc parliamentary committee charged with preparation of the new constitution.9 This principle is also very closely connected to the principle of transparency.

As far as the foundations of the parliamentary budgetary law are concerned, we can read that the Parliament – on the basis of the bill on the State Budget submitted by the Government – shall adopt the budget for each calendar year (State Budget Act). By adopting the State Budget Act, Parliament shall authorise the Government to collect the revenues and to disburse the expenditures defined by the same. The Parliament shall also adopt an Act on the implementation of the budget by the Government (discharge).

If Parliament fails to adopt the State Budget Act by the beginning of the calendar year, the Government shall be entitled to collect statutory revenues and disburse expenditures for the previous calendar year on a pro-rata basis in accordance with the expenditure targets defined by the State Budget Act.

Article 41 provides for the constitutional status of the National Bank of Hungary:

6 Article 42. Actually it is the Hungarian Financial Supervisory Authority which performs this supervision. The legal rules are included in the Act CXII of 1996 on credit institutions and financial enterprises. A cardinal act is an act of Parliament the adoption and amendment of which requires a two thirds majority of the votes of members of Parliament present. Article T (4) of the Fundamental Law.

7 As a matter of fact the Hungarian version of this provision does not contain the word “all”. That is why we criticised the text. We consider that an authentic interpretation must based on the Hungarian version as it was published in the official gazette “Magyar Közlöny” on 25 April 2011 No. 43, p. 10565, 10676.

8 Article 38 (3).9 Az Állami Számvevőszék elnökének Dr. Salamon Lászlóhoz, az Országgyűlés Alkotmány-előkészítő

eseti bizottsága elnökéhez 2010. szeptemberben intézett levele. IV. 1.) b) pont. (Letter of the President of the State Audit Office to the President of the ad hoc parliamentary committee charged with preparation of the new constitution in September 20120 point IV.1.b) http://www.parlament.hu/biz/aeb/info/asz.pdf. (downloaded 29.05.2011).


187


(1) The National Bank of Hungary shall be the central bank of Hun-

gary. The National Bank of Hungary shall be responsibility for monetary

policy as set out by a cardinal Act.

(2) The Governor and Deputy Governors of the National Bank of Hun-

gary shall be appointed for six years by the President of the Republic.

(3) The Governor of the National Bank of Hungary shall present to

Parliament an annual report on the activities of the National Bank of

Hungary.

(4) Acting within his or her competence defined by a cardinal Act, the

Governor of the National Bank of Hungary shall issue orders by statu-

tory authorisation, which may not conflict with any law. The Governor

of the National Bank of Hungary may be substituted for by a Deputy

Governor designated in an order for the purpose of issuing orders.

(5) The detailed rules for the organisation and operation of the National

Bank of Hungary shall be defined by a cardinal Act.

It is regrettable that – despite the proposals submitted to the ad hoc parliamentary committee charged with the preparation of the new constitution by the president of the NBH - the Fundamental Law does not contain any rule on the independence of the bank and that its primary objective is to attain and maintain price stability. We hope that with the cardinal act this imperfection will disappear.

The legal status and the tasks of the State Audit Office are laid down in the following way:

“(1) The State Audit Office shall be the financial and economic audit

agency of Parliament. Acting within its statutory competence, the State

Audit Office shall audit the implementation of the State Budget, the

management of public finances, the utilisation of funds from public

finances and the management of national assets. The State Audit Office

shall examine the criteria of lawfulness, practicality and efficiency.

(2) The President of the State Audit Office shall be elected for twelve

years by a two-thirds vote of the Members of Parliament.

(3) The President of the State Audit Office shall present to Parliament an

annual report on the activities of the State Audit Office.

(4) The detailed rules for the organisation and operation of the State

Audit Office shall be defined by a cardinal Act.”10

We agree with the fact that the tasks which had never been performed by the SAO - which are incompatible with its control philosophy - were abandoned. However – especially in the light of the tasks and powers of the Budget Council - it is difficult to understand why the Article fails to mention the control of the soundness of the Government’s bill on the State Budget. In fact this is not as serious as it first appears because the cardinal Act adopted on the basis of paragraph (4) on the State Audit

10 Article 43.

Várnay ERNŐ *

188


Office provides for the tasks of controlling the soundness of the Government’s bill on the State budget, the reality of the revenue estimates and the lawfulness and practicality of the implementation of the authorization of expenditures, including obligatory State investment(s).11

The text does not seem to modify the constitutional status of the SAO.

C. Novelties in the new constitution

What is new is that (3) The President of the Republic may dissolve Parliament and simultaneously announce elections if Parliament fails to adopt the State Budget for the current year by 31st March.12

It is also a new development that “The fundamental rules of general taxation and the pension system shall be defined by a cardinal Act for the predictable contribution to the satisfaction of common needs and to ensure decent living conditions for the elderly.”13 If this provision aims to prevent the too frequent modification of tax laws, we cannot but warmly welcome it. However, if the particular tax laws are to be voted by the “weak” two thirds majority in the Parliament we should be worried, because this constitutional requirement could easily lead to a financial-constitutional crisis of the State.

What is also new is that “National assets shall only be transferred for the purposes and with the exceptions determined by law and in consideration of the requirement of proportionate values.”14

IV. The Debt brake

The debt brake was introduced into Hungarian legislation on 1st January 2009. The Act on economical management of public funds by the state and budgetary responsibility provided that the balance of the general budget in the Budget Law is to be established in such a way that the state debt in the year t+2 in real terms does not exceed the debt at the end of the year t+1, and the state debt in real terms at the end of the year t+2 does not exceed the debt of the year t-2.15

For the purpose of this article the most radical novelty of the new constitution contains a different construction of the debt brake.

11 2011. évi LXVI. törvény az Állami Számvevőszékről (Act LXVI of 2011 on the State Audit Office) Art. 5 (1) http://www.kozlonyok.hu/nkonline/MKPDF/hiteles/MK11069.pdf in Hungarian.

12 Article 3. (3).13 Article 40.14 Article 38. (3).15 Act LXXV of 2008 on the economical state management and the accountability for the budget 3.§.


189


Article 36 of the Fundamental Law – limiting considerably the budgetary competencies of Parliament – reads as follows:

“(3) By adopting the State Budget Act, Parliament shall authorise the

Government to collect the revenues and to disburse the expenditures

defined by the same.

(4) Parliament may not adopt a State Budget Act which allows state

debt to exceed half of the Gross Domestic Product.

(5) As long as state debt exceeds half of the Gross Domestic Product,

Parliament may only adopt a State Budget Act which contains state debt

reduction in proportion to the Gross Domestic Product.”

The paragraph (6) contains the so called exemption clause (in legal terms: exceptions):

“Any deviation from the provisions in Paragraphs (4) and (5) shall

only be possible during a special legal order, to the extent required for

mitigating the consequences of the causes, and if there is a significant

and enduring national economic recession, to the extent required for

redressing the balance of the national economy.”

For an effective debt brake Article 37 limits the breathing space of the government when implementing the budget:

“(2) During the implementation of the State Budget, no debt or finan-

cial obligation may be assumed which allows state debt to exceed half

of the Gross Domestic Product, with the exceptions defined by Article

36(6).

(3) During the implementation of the State Budget, as long as state

debt exceeds half of the Gross Domestic Product, no debt or financial

obligation may be assumed which allows the share of state debt related

to the Gross Domestic Product to exceed its level in the previous year,

with the exceptions defined by Article 36(6).”

We have to notice that the provisions on the debt brake remain silent about the annual deficit/surplus of the State budget and the path taken to reach the prescribed debt level.

The Fundamental Law includes rules which can “facilitate” compliance with the constraints implied in the debt brake; others can be seen as preconditions for compliance, and there are others which serve to enforce the requirements.

A. The Budget Council in a new role

The most direct assurance for the effective functioning of the debt brake is the Budget Council which has been newly inserted into the constitution.

Várnay ERNŐ *

190


According to the Article 44 (3):

“(3) The adoption of the State Budget Act shall be subject to the prior

consent of the Budget Council in order to meet the requirements set

out in Article 36(4)-(5).”

B. The Constitutional Court’s power to annul the State Budget Act

After the adoption of the State Budget Act by Parliament the Constitutional Court is empowered to annul the act in case of a breach of the rules in the Fundamental Law relative to its adoption and promulgation.

If we consider that the rules related to the debt brake clearly come into this category, this competence is a kind of last resort to implement the brake.16

C. The delimitations of the powers of the Constitutional Court – a necessary method to ensure the effectiveness of the debt brake?

Article 37 (4) stipulates as follows: “As long as state debt exceeds half of the Gross Domestic Product, the

Constitutional Court may, within its competence set out in Article 24(2)b-e), only review the Acts on the State Budget and its implementation, the central tax type, duties, pension and healthcare contributions, customs and the central conditions for local taxes for conformity with the Fundamental Law or annul the preceding Acts due to violation of the right to life and human dignity, the right to the protection of personal data, freedom of thought, conscience and religion, and with the rights related to Hungarian citizenship. The Constitutional Court shall have the unrestricted right to annul the related Acts for non-compliance with the Fundamental Law’s procedural requirements for the drafting and publication of such legislation.”

One possible interpretation of these provisions would be that these are necessary in order to prevent the Constitutional Court protecting fundamental rights - apart from the “most fundamental rights” - to bring friction into lawmaking, aiming at the reduction or the maintenance of the public debt under the previously determined ceiling. These laws are expected to be tax laws in general.

A provision limiting the competences of the Constitutional Court in the field of financial legislation exists in the Constitution of 1949. Unfortunately this provision has a bad “criminal record”. Parliament inserted it after the Constitutional Court

16 A review of conformity can be made at the request of the Government, one quarter of the Members of Parliament or the Commissioner for Fundamental Rights. According to Art. (9) paragraph (3) i) the President of the Republic may send adopted Acts to the Constitutional Court to examine their conformity with the Fundamental Law, or may return them to Parliament for reconsideration.


191


annulled the Act which ordered - in the form of a tax law – the repayment of 98 % of certain revenues gained by civil servants as it “hurt social justice”.17-18

If we glance at the case law of the Constitutional Court in tax-related matters it becomes clear that the limitations in the Fundamental Law are based on irrational fears.

First the Constitutional Court is very permissive as far as the objectives of taxation are concerned. It admits that taxation is not only a way of making available the financial resources for public services (public goods) but also a tool of the government’s general economic policy. In this respect the “the constitutional room for manoeuvre” of the legislator is very broad.19

As far as the determination of the tax base is concerned, the Constitutional Court declared unconstitutional any demand for an unspecified amount of tax, which breaches the principle of legal certainty and by this the rule of law.20-21

As early as 1992 the Constitutional Court took the view that the tax rate is not in itself a constitutional question. It becomes a question of constitutionality if the rules are discriminative or attain an amount manifestly disproportional or unjustifiable.

The Constitutional Court also declared that taxable entities have the right to have enough time and opportunity to prepare themselves for the negative consequences of any new tax provisions. The Constitutional Court declared unconstitutional the provisions for tax liability with retroactive effect.

According to the CC the taxation can not be arbitrary and the decisions of the tax authorities have to be open to challenge before the courts or other instances of appeal.

Concerning tax allowances and exemptions the CC stated that – while the legislator is bound by constitutional requirements – the decisive issues are not legal in nature and the CC is not empowered to control the social rationality of a tax measure.22

The CC also declared that in order to protect human dignity the State has to abstain from measures application of which would seriously jeopardize the subsistence of the taxable person and that of his or her close relatives living with her or him.23

In a very recent decision the CC produced a very interesting statement: The laws containing state interventions have to balance the fundamental rights in order to defend the private sphere of natural persons with the social, political and economic objectives of these interventions. If these latter are implemented in a unilateral, exclusive and undifferentiated manner, they will violate fundamental rights and especially human dignity.24

We can summarise the case law of the CC as follows:

17 Art. 32/A of the Constitution of 1949.18 Dec. 184/2010. (X.28.) AB.19 Dec. 1747/B/2010. AB, Dec. [31/1998. (VI. 25) AB, Dec. 658/B/1994. AB.20 Dec. 8/2010. (I.28) AB.21 Dec. 1558/B/1991. AB, Dec. 1531/B/1991. AB.22 Dec. 61/1992. (XI.20.) AB.23 Dec. 47/B/2010. point 4.2.5., Dec. [73/2009. (VII.10.) AB.24 Dec. 37/2011. (V.10.) AB.

Várnay ERNŐ *

192


The tax-legislator is restrained only if the planned law would be of retroactive effect, does not allow enough time for preparation, is discriminative, the tax base is uncertain, the tax rate is exaggerated (in particular when it jeopardizes the subsistence of the taxable natural persons and if the unilateral, exclusive attainment of the public interest hurts human dignity).

We consider that the above mentioned constraints can not fetter a well prepared, reasonable and fair taxation system. The fact that the reduction in the powers of the CC in the field of financial legislation (taxation) are placed in the new constitution alongside the means which are designed to smooth the operation of the debt brake, cannot hide the fact that the principle of the rule of law is significantly damaged.25

We agree with Professor Sólyom, former President of the CC and President of the Republic of Hungary who describes these limitations as a serious step back which turns the perception according to which politics prevails over law into an actual fact. “The way the (legislator) put these limitations into the constitution with an illusory ending which will never become reality for our generation is painfully cynical.”26

D. The control exercised by the State Audit Office

The tasks given to the State Audit Office in the new constitution seem to offer an adequate basis for the ex post control of the financial management of public funds in terms both of budget and property. The compliance with the (constitutional and legislative) rules concerning the public debt is not mentioned either in the Fundamental Law or in the “cardinal law” on the State Audit Office.27 This can be interpreted as the will of the pouvoir constituant and the legislator (which in this particular historical moment is the same Parliament). We also have to bear in mind that the findings of the State Audit Office do not have any binding force.

E. Discharge given by Parliament

The expenditures and revenues included in the general budget are appropriations. The amounts on the revenue side are only estimates. The appropriations on the expenditures side are – in an optimal case – only upper limits to government expenditures. The actual implementation of the budget can differ from the appropriations (estimates) entered into the budget act. That is why the discharge procedure - the ex post parliamentary control of the implementation of the budget by the government - would be of primary importance.

25 According to László Sólyom, “Almost all important economic objectives of the Government could have been attained in conformity with the Constitution if they had given them enough time and professional knowledge.” Heti Válasz, 2011. április 21., p. 40 in Hungarian.

26 László Sólyom, op. cit. in footnote 25 p. 40.27 Act LXVI of 2011 on the State Audit Office See footnote number 11.


193


One can find in the Fundamental Law the classical legal institution of the parliamentary budgetary law that the Parliament allows discharge to the Government in respect of the implementation of the budget in an (ordinary) Act. The bill on implementation has to be presented by the Government.

According to Article 36 (2) “(T)he Bill on the central budget and the Bill on implementation thereof shall contain all state expenditures and revenues in an identical format, in a transparent manner and in reasonable detail.”

The Fundamental Law – just as the Constitution of 1949 – does not contain any legal consequence of a refusal to allow discharge (i.e. Parliament does not vote the bill into an act). It is obvious that the practical eventuality of this is very low. However we consider that a constitution is not only a collection of provisions expected to rule daily life, but is also a declaration of values and political convictions, etc. If the makers of the new constitution were not prepared to introduce hard legal consequences of a refusal to allow discharge by the parliament, they should at least have inserted the political significance of the discharge given by the parliament: The Parliament discharges the Government from its responsibility for the implementation of the budget. The necessity for this kind of formula was underlined by the SAO and in the regulatory principles of the new constitution.28

F. Limitation of the indebtedness of local authorities

While local authorities have their own property rights and their own budgetary resources, they are legal entities and their debt forms part of the public debt of the Member States in the European Union.

The Article 34 (5) of the Fundamental Law provides: “In the interest of preserving a balanced budget, an Act may prescribe that if a local government wants to contract a debt above a level defined by an Act or to undertake any other commitment, it shall obtain the consent of the Metropolitan or County Office of the Government.”

It is foreseeable that this provision will be perceived by the local authorities as a limitation on their autonomy.

G. The prohibition of national referenda

The Hungarian constitutional system, based on the primacy of representative democracy, restricted the influence of the direct democracy on lawmaking.

It is small wonder, that the new constitution – like its predecessor – excludes from the objects of national referendum the acts on the general budget, the discharge of

28 Állami Számvevőszék: A közpénzügyek szabályozásának elvei. (State Audit Office, The principles of the regulation of the public finances) Pénzügyi Szemle. 2007.No. 2, pp. 314-323.

Várnay ERNŐ *

194


the Government for the implementation of the budget, national taxes, excise duties, contributory customs duties and the substance of the act on local taxes.29

H. Control exercised by public opinion

One might consider the provisions of Article 39 (The Protection of Public Funds) a guarantee of the balanced and transparent management of public funds30:

“(1) Only such organizations may receive funding or contracted pay-

ments from the central budget in which there is transparency of

ownership structure, organization, and of the activities for which fun-

ding are to be used.

(2) Every organization managing public funds shall publicly account for

the management of those funds. Public funds and national assets shall

be managed according to the principles of transparency and of corrup-

tion-free public life. Data relating to public funds or to national assets

shall be considered to be data of public interest.”31

These provisions can provide the necessary constitutional basis for the law-enforcement effect of public opinion.

V. The debt brake in the Fundamental Law – but why?

A. Professional considerations?

In public finance literature it is a commonly held opinion that the adoption of a financial framework (fiscal policy rules) can support a sustainable fiscal policy.

One of the main elements of this is the rule-based planning and implementation of the budget. Fiscal policy rules mean that any of the comprehensive indices – such as the deficit, the debt or expenditures – is fixed as a constant requirement.32

The introduction of these rules – if they receive legal form at all – into the legal system can take place within the constitution, in another high level source of law or even in an ordinary law.33 Their common goal is the ex ante restriction of the expected result of the implementation of the budget.

29 Art. 28/C § (5) a) of the Constitution of 1949, Art 8 (3) of the Fundamental Law.30 Article N of the Fundamental Law?31 According to Art VI (2) “Every person shall have the right to the protection of his or her personal data,

and to access and disseminate data of public interest.”32 Kopits, G. - Symansky, S.: Fiscal Policy Rules. IMF Occasional Papers, 1998. No 162.33 For example Art 216 (5) of the Polish Constitution provides: “It shall be neither permissible to contract

loans nor provide guarantees and financial sureties which would engender a national public debt


195


Given that the restrictive budgetary measures, the effects of which are limited to one or two years, are not appropriate for the attainment of mid- or long term goals, the fiscal rules – in order to be effective – require that the annual budget is to be part of a multi-annual budgetary plan.

Compliance with the fiscal rules can be assisted by the establishment of an independent body (the “budget council”, fiscal council) which scrutinizes the soundness of the budget (the financial planning) and monitors its execution. The tasks of the independent body can include the preparation of budgetary forecasts. The establishment of this kind of body requires clear definition of the tasks and powers inserted in the form of durable legal arrangements. The budget council also needs financial, functional and personal independence vis-à–vis fiscal authorities. It is essential that the independent fiscal institution has access to internal information in the national statistical office, ministries and other governmental bodies. The involvement of the fiscal council in the budget process (regular hearings in the parliament, consultations with the government) is also advisable.34

In 2007 Kopits suggested for Hungary the establishment of an independent supervisory authority to permanently monitor compliance with all the elements of the fiscal policy framework especially in respect of the targets for primary surplus and the primary expenditures, the 3 year financial framework, the fiscal forecasts and the relevant transparency provisions. This institution could propose correcting measures and sanctions in case of non-compliance and determine the crucial sectors of the reforms in order to make them sustainable over the long term. In this contribution Kopits also considered it advisable to empower the State Audit Office with the supervision of the fiscal rule based fiscal policy.35

The State Audit Office itself in its “Principles of the regulation of the public finances” published in 2007, also was in favour of the introduction of rule-based fiscal policy and the establishment of an independent fiscal institution in order to have a balanced budget as the primary element of a sustainable development.36

The provisions in the Fundamental Law only seem to satisfy the above mentioned requirements in a fragmentary manner.

B. Compliance with EU obligations?

It might seem strange that in the public discourse in Hungary a very small place is given to the legal obligation stemming from the country’s EU membership; that is to

exceeding three-fifths of the value of the annual gross domestic product. The method for calculating the value of the annual gross domestic product and national public debt shall be specified by statute.”

34 European Commission, Public Finances in EMU 2010. European Economy. 2010. No. 4, 106.35 Kopits György, A költségvetési felelősség keretrendszere Nemzetközi tapasztalatok és magyarországi

tanulságok. (The fiscal policy frameworks. International experiences and lessons to be drawn for Hungary) Pénzügyi Szemle. 2007.2. sz. 197-369., 209.

36 Állami Számvevőszék, A közpénzügyek szabályozásának elvei. (State Audit Office, The principles of the regulation of the public finances) Pénzügyi Szemle. 2007.No. 2 pp. 314-323 at 318

Várnay ERNŐ *

196


say the compliance with the budget deficit ceiling (3 % of the GDP) and the public debt ceiling (60 % of the GDP). Because the budget deficit has exceeded the reference value, from 5th July 2004 Hungary has been permanently under the excessive deficit procedure.37 At the end of 2010 the budget deficit amounted to 4.2 % of GDP38, and public sector debts amounted to the 80.2 % of GDP.39

Under the Hungarian presidency the Council of the European Union adopted a Draft Council Directive on requirements for budgetary frameworks of Member States.40 Article 8 of this concerns medium-term budgetary frameworks:

“1. Member States shall establish an effective medium-term budgetary

framework providing for the adoption of a fiscal planning horizon of at

least three years to ensure that national fiscal planning follows a mul-

tiannual fiscal planning perspective.

2. Medium-term budgetary frameworks shall include procedures for

establishing the following items:

(a) comprehensive and transparent multi-annual budgetary objec-

tives in terms of the general government deficit, debt, and any other

summary fiscal indicator, ensuring that these are consistent with

any numerical fiscal rules as provided for in Chapter IV in force,

(b) projections of each major expenditure and revenue item of

the general government with more specifications on the central

government and social security level, for the budget year and

beyond, based on unchanged policies,

(c) a description of medium-term foreseen policies with an impact

on general government finances broken down by major revenue

and expenditure item, showing how the adjustment towards the

medium-term budgetary objectives is achieved compared to projec-

tions under unchanged policies.

3. Projections adopted within medium-term budgetary frameworks

shall be based on realistic macroeconomic and budgetary forecasts in

accordance with Chapter III.”

Articles 5 and 6 of the Draft Directive expect to make obligatory the numerical fiscal rules for all the Member States:

“Member States shall have in place numerical fiscal rules that effecti-

vely promote compliance for the general government as a whole with

37 2004/918/EC: Council Decision of 5 July 2004 on the existence of an excessive deficit in Hungary OJ L 389, 30.12.2004, p. 27–27 (38 http://portal.ksh.hu/portal/page?_pageid=37,1036058&_dad=portal&_schema=PORTAL (2011.

05. 29.)39 According to the data published by the Hungarian National Bank.40 Draft Council Directive on requirements for budgetary frameworks of the Member States http://

register.consilium.europa.eu/pdf/en/11/st07/st07847.en11.pdf.


197


their respective obligations deriving from the Treaty in the area of bud-

getary policy. Such rules shall promote in particular:

(a) compliance with the reference values on deficit and debt set in

accordance with the Treaty;

(b) the adoption of a multi-annual fiscal planning horizon, including

respect of the medium term budgetary objectives.

Article 6

1. Without prejudice to the Treaty provisions of the budgetary sur-

veillance framework of the Union, numerical fiscal rules shall contain

specifications on the following elements:

(a) the target definition and scope of the rules;

(b) effective and timely monitoring of compliance with the rules,

(c) consequences in the event of non-compliance;

2. If numerical fiscal rules contain escape clauses, these shall set out a

limited number of specific circumstances or stringent procedures in

which temporary non-compliance with the rule is permitted.”

Furthermore, the 24-25 March 2011 European Council adopted the so call Euro Plus Pact41 which also reflects the necessity of the strong legal form of the fiscal rules:

“National fiscal rules

Participating Member States commit to translating EU fiscal rules as set

out in the Stability and Growth Pact into national legislation. Member

States will retain the choice of the specific national legal vehicle to be

used, but will make sure that it has a sufficiently strong binding and

durable nature (e.g. constitution or framework law). The exact formula-

tion of the rule will also be decided by each country (e.g. it could take

the form of a “debt brake” rule related to the primary balance or an

expenditure rule), but it should ensure fiscal discipline at both national

and sub-national levels.

The Commission will have the opportunity in full respect of the pre-

rogatives of national parliaments, to be consulted on the precise fiscal

rule before its adoption so as to ensure it is compatible with, and sup-

portive of, the EU rules.”

As is well known, according to government decision Hungary decided not to join the Euro Plus Pact, but declared its intent to respect its objectives.

It is obvious that the draft directive – the provisions of which are very much in line with the proposals suggested by the literature – did not have any significant effect on the drafters of the constitution (while the content of the draft directive must have been well known before them). None of the obligations of the Parliament and the tasks of the State Audit Office or the Budget Council entered into the Fundamental Law

41 European Council Conclusions – 24/25 March 2011 Annex I : The Euro Plus Pact Stronger economic policy coordination for competitiveness and convergence.

Várnay ERNŐ *

198


seems to provide a systematic, deliberate foundation for the multi-annual budgetary frameworks rules.

C. Political rationality?

The reasoning of the Széll Kálmán Plan – a document outlining the general economic policy of the Government - seems to be much more a slogan for gaining and preserving the political sympathy of the voters than a substantial justification:

“It also a fact, that the Constitution in force could not defend Hun-

gary from being pushed into indebtedness by its leaders misusing their

powers. That is why the new Constitution has to protect the country

from the misuse of power. This is also a prerequisite of our victory over

the public debt.”42

The latest Convergence Programme presented to the European Commission – based on the Széll Kálmán Plan – adopts a slightly different style when presenting the (than proposed) new chapter of the new Constitution:

“The Proposal (for the new Constitution) has a separate chapter that

deals with public finances, in which the Proposal sets strict require-

ments to fiscal management in order to ensure that excessive emphasis

on current needs or interests do not impose an unbearable burden on

future generations. It declares the permanent reduction of public debt

as a fundamental value; accordingly, it defines a ceiling for the public

debt ratio at 50% of GDP, a threshold below the reference value of the

Treaty. Since the present level of public debt is significantly higher

than the target of 50%, the Proposal sets forth that Parliament and the

Government, primarily responsible for the implementation of the bud-

get, are to decrease public debt until the target level is attained. The

Government is only authorised to refrain from adhering to the above

fiscal rules if special circumstances arise and in a degree in line with

such circumstances. Since it is necessary to unequivocally define both

public debt and the gross domestic product, the Proposal sets forth that

the methods for calculating these figures is to be included in law.

On the basis of the Proposal, the consent of the government (or gover-

ning body) can be required for the borrowing or other undertaking

of obligations on behalf of local governments, as defined in relevant

legislation.”

42 Government of Hungary Convergence Programme of Hungary 2011-2015. Based on the Széll Kálmán Plan. Budapest, April 2011. pp. 69-70 http://ec.europa.eu/europe2020/pdf/nrp/cp_hungary_en.pdf (downloaded 18.11. 2011)


199


We suggest that the overwhelming reason for the insertion of the debt brake in the new Constitution was the desire of the new Government to regain a maximum room for manoeuvre in the economic (and social) policy sphere. This freedom is strongly limited by the burdensome debt service and by financial markets penalising the high debt rate in the era of a global economic crisis.

VI. Critical remarks – de lege ferenda proposals concerning the debt brake

My first critical remark would be that the right and obligation of the multi annual financial planning and/or the preparation of independent multi annual financial forecasts is missing from the Fundamental Law.

If the annual budget does not fit into a multiannual budgetary plan and/or there is no mid-term budgetary forecast it is not possible to judge how to ensure public finances are really sustainable, and that the (relative) decrease of the public debt can really be expected. Without this kind of plan and/or forecasts the decision of the Budget Council about the soundness of the Budget Bill would necessarily be of limited value.

The President of the State Audit Office had proposed the insertion of the legislative power of the Parliament over a national economic and social plan which could create a reliable economic, professional and legal basis for the financing of multi-annual programmes. The proposal has not been accepted by the constituent power.43

Consequently we propose an amendment to the Fundamental Law or adoption of a law obliging the Government to prepare a multi-annual budgetary plan.

It is foreseeable that very soon not only the public debt threshold will be inserted into the budget law but also the maximum of the annual deficit.

A. The three metamorphosis of the Budget Council

The Budget Council was established by Act LXXV of 2008. According to the law the Budget Council consisted of three members proposed by the President of the Republic, the President of the State Audit Office and the President of the Hungarian National Bank and elected for nine years by Parliament. The Budget Council was an independent body whose main task was to support the Parliament in its legislative function. Its activities included the preparation of macroeconomic forecasts, estimates on the external budget effects of budgetary bills and other legislative drafts. The BC

43 We would like to note that from 2008 Art. 34 of the French constitution provides for Programming Acts: “The multi-annual guidelines for public finances shall be established by Programming Acts. They shall be part of the objective of balanced accounts for public administrations.” http://www.conseil-constitutionnel.fr/conseil-constitutionnel/root/bank_mm/anglais/constitution_anglais.pdf.

Várnay ERNŐ *

200


was supported by its Secretariat. The BC did not have any power to adopt obligatory acts.

The 2010 modification of the Act44 completely transformed the BC, creating in fact a brand a new organisation.

The president of the BC is nominated by the President of the Republic; the two other members are the President of the State Audit Office and the President of the Hungarian National Bank. Its task is to give its opinion on the Draft budget. In this opinion it can make observations. If it considers that it has significant problems with the soundness of the Draft, the Government must undertake a second reading of the Draft. The Draft can only be tabled to Parliament after the opinion of the BC has been delivered to the Government. The second opinion is to be published without delay. The Act abolished the Secretariat of the BC.

The Fundamental Law – while maintaining the composition and the basic tasks of the institution – entrusts the BC with a completely different power: the right to activate the debt brake. It is also obvious that – given that the BC does not have its own Secretariat – the BC is not capable to perform its task of its own.

B. Some critical remarks and suggestions regarding provisions on the Budget Council

Maybe the most striking shortcoming of the rules on the Budget Council is that it has no competence to control the exemption from the application of the debt brake in exceptional circumstances. If the new constitution wishes to be consequent this is certainly an imperfection to be eliminated.

It seems to be inconsistent that while the President of the State Audit Office is a member of the BC, the State Audit Office – his or her natural administrative arm - does not as such have any competence to control the soundness of the Draft budget. This shortfall has been partly filled in the new (cardinal) Act on the State Audit Office. Unfortunately the Act does not contain any reference to budgetary forecasts.

These kinds of forecasts and the estimates of the financial consequences of the envisaged Government measures can offer protection from “governmental optimism”45

The most adequate solution might well be to have the BC itself prepare these forecasts. We do not see any constitutional obstacle to this. On the contrary; Article 43 (2) provides a correct legal basis for this kind of function.46

It would also be desirable that the BC is given the power to monitor the implementation of the budget. This competence would allow it to signal the need for corrections and maybe to present proposals for corrective measures.

44 Act CLIII of 2010.45 European Commission, op. cit., p. 106.46 The Budgetary Council shall contribute to the preparation of the Act on the central budget as specified

in an Act.


201


The composition of the BC reflects the intention to establish an independent body. Meanwhile it seems to be problematic that the President of the Hungarian National Bank is a member of the BC. The President of the HNB – especially if the staff of the Bank is prepared to assist her or him - is certainly capable of making a relevant judgment on the soundness of the Draft budget or preparing macro economic forecasts and monitoring the execution of the budget. The problem is that the independence of the monetary policy required by the Act on the HNB and also by the Treaty on functioning of the European Union would be endangered.

Act LX of 1991 provided for cooperation between the HNB and the Government in the formation of monetary and budgetary policy. In 2001 the Act was modified in order to comply with EC law and “cooperation” was replaced by “preliminary information” and “right to adopt opinions”.47

The new provisions of the Fundamental Law render the President of the HNB accountable for the budgetary policy which is not compatible with the independence of monetary policy. The legislator – not the constituent power - realized this conflict and provided that the “activity of the President of the HNB and the SAO shall not prejudice the accomplishment of their tasks provided by law. The positions or decisions of a person acting in his or her quality as a member of the BC shall not oblige him or her to accomplish his or her tasks in their respective quality as President of the HNB and SAO”.48 This solution seems to be unsatisfactory because it could result in a kind of conflict of interest because it is hardly to be expected that the same person takes different positions in his or her different roles.49

It is problematic that the members of the BC are not paid for their work. Actually only the President accomplishes his tasks gratis. In the interest of the complete independence of the BC remuneration would be more assuring.50

47 Act LVIII of 2001 on the National Bank of Hungary Art. 37.48 2008. évi LXXV. törvény a takarékos állami gazdálkodásról és a költségvetési felelősségről. 9. § (3)

bekezdés.49 Actually this kind of conflict of interest has arisen in 2011 when the President of the State Audit Office

voted „yes” in the Budget Council on the soundness of the budget bill of the year 2012 while the opinion of the State Audit Office (published later) was rather negative.

50 This requirement was mentioned also by the European Commission European. Commission, op. cit. p. 106. Referring to the president of the BC Professor George Kopits made this note at the conference mentioned in footnote number 1.

public finances in hungary's new constitution - the debt brake

Documents