Balazs Romhanyi of the Hungarian Fiscal Responsibility Institute gave a presentation about the Hungarian experience of setting up an Independent Fiscal Institution.

1. © OECD
AjointinitiativeoftheOECDandtheEuropeanUnion,
principallyfinancedbytheEU
Roundtable Meeting
How to set up an Independent Fiscal
Institution (IFI) – Hungarian experiences
Balázs Romhányi, Fiscal Responsibility Institute Budapest
Hungary
Podgorica, 28 May 2015

2. AjointinitiativeoftheOECDandtheEuropeanUnion,
principallyfinancedbytheEU
Structure of the presentation
• Delegation of monetary vs fiscal policy
• Normative vs positive tasks of an IFI
• The Hungarian experiences:
 1991-2008
 2009-2010
 2011-
• SAO as an IFI: pros and cons
• Possible ways forward
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3. AjointinitiativeoftheOECDandtheEuropeanUnion,
principallyfinancedbytheEU Delegation of monetary vs fiscal policy
Monetary
policy
Fiscal
policy
Goal: Single goal:
low inflation
Many goals:
High and stable growth,
Moderate inequality,
Social inclusion, etc.
Instrument: Central bank rate All the parameters of
the tax system, the
benefit system, public
goods produced by the
government, subsidies,
regulation, etc.
Adequacy of the
instrument
Broad scientific
consensus about
adequacy
No scientific consensus
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4. AjointinitiativeoftheOECDandtheEuropeanUnion,
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Possible positive roles of an IFI
• Macro scenario
• Forecasting mandatory items and tax revenues
• Fiscal impact assessment of proposals
• Assessment of the fiscal rules
 Ex post
 Ex ante
• Long term projections
• Public database
• Education
 Public: e.g. citizens’ budget, gender budget, newsletters
 Media: e.g. training courses, newsletters
 Deputies: e.g. training courses, consultancy in impact assessment
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5. AjointinitiativeoftheOECDandtheEuropeanUnion,
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Possible ‘half-normative’ roles of an IFI
• Policy options
• Pricing election programs
• Advising on budgeting system development
 Transparency
 Sustainability
 Public financial control
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6. AjointinitiativeoftheOECDandtheEuropeanUnion,
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Hungarian experiences 1991-2008.
• The Hungarian SAO was established in 1989
• From the very beginning it had the role (beyond traditional SAO riles) to assess ex ante
the government’s budget proposal
• The parliamentary budget debate started with a first vote about the suitability of the
budget proposal for a general debate
• Before this first vote the SAO (and the central bank) had to give its opinion to the
parliament
• Already in 1993 the SAO made an internal decision not too give any alternative
quantitative estimate for specific budget items or the macro assumptions.
• The opinion only contained expressions like, “the VAT revenue estimate is risky” or “the
SAO couldn’t completely be convinced that the number is well founded”.
• Since the vote was about the “suitability for a general debate”, the parliament only had
the nuclear option to send the government back to work and ask for another proposal,
but the government always had a majority in the parliament, the nuclear option was
never used, so the SAO-exercise had an approximately zero effect on budgetary
planning.
• The whole point can easily be seen from the fiscal performance of Hungary: between
2000-2006 Hungary had probably the worst fiscal policy in the EU.
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7. AjointinitiativeoftheOECDandtheEuropeanUnion,
principallyfinancedbytheEU
Hungarian experiences 2009-2010
• Legal environment
• Independence and nonpartisanship
• Timetable of assignments assumed
• Staffing issues
• Relation with the government
• Relation with the media
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8. AjointinitiativeoftheOECDandtheEuropeanUnion,
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Legal environment
• The Hungarian Fiscal Council was set up by the
fiscal responsibility law of 2008 in tandem with
the introduction of national fiscal rules and new
transparency requirements.
• The fiscal rule was embedded in a medium term
fiscal framework and separated mandatory from
discretionary budget items
• FC was required to
 Produce baseline projections
 Fiscal impact assessments concerning all laws affecting
mandatory budget items
 Assess the respect of the fiscal rule
 Assess unfunded mandates 7

9. AjointinitiativeoftheOECDandtheEuropeanUnion,
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Independence and nonpartisanship
• Three nonpartisan members
• Nonpartisan ≠ Bipartisan
• Long (9 years) and non-renewable term of the
members of the council
• The head of the council couldn’t have any other
job and other conflict of interest rules
• The head was nominated by the president of the
republic
• The president of the SAO and the governor of the
central bank could nominate one member each
• All members were elected by the parliament 8

10. AjointinitiativeoftheOECDandtheEuropeanUnion,
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Timetable of assignments assumed
2009
• February : election of the council
• August: first baseline scenario – only macro +
fiscal risks
• October: macro-fiscal baseline scenario for the
next year
2010
• March: macro-fiscal baseline scenario for the
current + next three years
• June: fiscal impact assessment of tax legislation
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11. AjointinitiativeoftheOECDandtheEuropeanUnion,
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Staffing issues
• February 2009: election of the council
• May 2009: 3 economist members of the staff
• September 2010: 35 economists
• Some members of the staff came back from
overseas to assume the job
• Young, dedicated people eager for a
professional challenge
• At the beginning some conflicts with the MoF,
finally in most cases normal cooperation
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12. AjointinitiativeoftheOECDandtheEuropeanUnion,
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Relation with the government
• ‘Arms length’ relation
• Determination to assume meaningful and
necessary conflicts, but to avoid unnecessary
conflicts (e.g. based on misunderstanding) at
any price.
• All papers were sent to the government before
publication, so they have an opportunity to
give their views on data, methodology or even
interpretation, but zero negotiation about
possible political consequences or about
message of the results. 11

13. AjointinitiativeoftheOECDandtheEuropeanUnion,
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Relation with the media
• Focus on the public media
• No favoritism in general
• Focus on the few journalists willing to learn
(e.g. new notions, like the baseline scenario
had to be introduced)
• Background conversations to explain the
documents shortly before publication, but in
exchange for “better and more in-depth
articles”
• Only positive experiences, no misuse of
information
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14. AjointinitiativeoftheOECDandtheEuropeanUnion,
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Hungarian experiences 2011-.
• The fiscal council consists of three members:
 Head
 Central bank governor
 President of the SAO
• No alternative quantitative estimates
• Only a nuclear option: veto right before the
final vote on the budget
• Nothing about substantive laws
• No role in transparency
• Permanent mixing up of positive and
normative roles 13

15. AjointinitiativeoftheOECDandtheEuropeanUnion,
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SAO as an IFI
• Pros:
 Inherited credibility
 Operational efficiency (no need for further admin
staff)
• Cons:
 Conflict of interest at SAO: ex ante vs ex post
 Capacities of a SAO (accountants, auditors and
economists are different)
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16. AjointinitiativeoftheOECDandtheEuropeanUnion,
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Beyond the textbook
 Cement dries fast
 How to develop credibility
• Full disclosure of data and methodology
• Educate the media
• Chirac’s method
 How to develop an IFI staff:
• A few good macro experts
• A few good statistician and econometrician
• IT experts
• Young, enthusiastic, well trained beginners
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17. AjointinitiativeoftheOECDandtheEuropeanUnion,
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Possible ways forward 1.
• The SAO assumes the role of a full fledge IFI
 Separate, independent arm within (attached to)
the SAO
 Dedicated staff
 Own, but fully transparent models and
methodologies
 Own communication with the media
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18. AjointinitiativeoftheOECDandtheEuropeanUnion,
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Possible ways forward 2.
• The SAO only endorses/refuses the government’s proposal
 Not only the budget law, but all laws affecting
mandatory items have to assessed
fiscal outcome =
baseline
+ substantive laws affecting mandatory items
+ the annual budget law on discretionary items
 Full transparency is required on behalf of the
government concerning data and methodology
 Methodology has to be endorsed by the SAO ex ante
(e.g. in frame of an expert conference)
• If these three are met, SAO can avoid publishing own
forecasts
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AjointinitiativeoftheOECDandtheEuropeanUnion,
principallyfinancedbytheEU
Thank you for your attention
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