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Thematic Publication: Makro Risks - Indebtedness

The Effect of the Economic Crisis on Local Governments in OECD Countries

The domestic financial risks of the Hungarian local government sector


Péter Halmosi
Associate Professor, University of Szeged

Published in: Public Finance Quarterly 2013/3 (p. 293-306.)


Summary: Stabilising the financial health of local governments, as well as restructuring their financing system gained increased attention in recent years both in Hungary and abroad. This increased attention should be emphasised on account of two reasons. Firstly, the financialeconomic rippling effect of the economic crisis of 2008 has impacted all the countries, and this ripple also surfaced in the local government sector through the collapse of the fragile balance of own revenues and expenditures. Secondly, significant changes have begun in the allocation of tasks and revenues between local and central government levels, and new statutes have been created with respect to government performance, the management of public procurement, the transparency of operation and government auditing. It is a fact that in recent times, the examination of the operation of the local government system has become a central issue not just in terms of resource and task allocation, but in terms of other performance aspects as well. The State Audit Office of Hungary has been treating the supporting of Hungarian local governments through audits as a priority issue since 2011, one of the main justifications of which is that in 2010, the deficit of the local government sector raised the GDP-proportionate public debt from the planned 3.9 per cent to 4.2 per cent. This could have stimulated the increase in the number of audits and recommendations, which should be considered a significant, forward-thinking result of the recent period. The aim of this study is, on the one hand, to provide an international overview of the effect of the economic crisis on local governments and how these local governments searched for the way out, and on the other, to review the reform processes launched. One of the important findings of this study is that the reform of financial management in Hungarian local governments has significant and measurable results, at the same time, however, the risks accumulated make the sustainability of results uncertain.

Keywords: state and local government borrowing, intergovernmental financial relations, federalism, financial crisis

Journal of Economic Literature (JEL) kód: H74, H77, G01


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