Discussions of the transition in Eastern Europe emphasize macroeconomic stabilization, liberalization of domestic prices and international trade, privatization and restructuring, but they typically neglect the role of the government budget. In Discussion Paper No. 696, Tamás Révész and Ernö Zalai present a preliminary assessment of its role in Hungary. They first define a tax or subsidy as a payment that causes the `price' to one or more economic agents to differ from the market equilibrium price. They define the `state' as the central government budget, extra- budgetary state funds, the social security fund, local government, central budgetary institutions, state-administered public enterprises, state-owned commercial enterprises, the central bank, state-owned financial institutions, state- controlled social organizations and state-controlled foundations. The `private' economy comprises households, private firms and other non-state economic units.

Révész and Zalai then present a detailed account of the fiscal position in 1990, the most recent year for which reasonably complete data are available. By this time Hungary, unlike other East European countries, already had a diversified tax system with all the main taxes in place, which formed a sound basis for further reforms. This did not apply to the provision of social welfare or other subsidies; certain subsidies have already been reduced or eliminated since 1990 (such as those to personal consumption and exports to the rest of Eastern Europe) but others (such as those to housing) remain. Social benefits in cash such as pensions are falling in real terms and leaving large population groups in serious poverty, while others such as unemployment benefit are currently rather generous in relation to the average wage, and they are likely to place heavy demands on the budget in the coming years.

Many implicit or hidden subsidies remain, most of which derive from the `indirect central planning' that prevailed during 1970- 89, when groups (or individual firms) facing economic pressures often found lobbying a central agency for special treatment more effective than striving to adapt to market conditions. It will take time to overcome this legacy of socialism: the government still does not feel strong enough to resist all demands for concessions and itself makes use of implicit subsidies to mask otherwise unpopular decisions; it is also much easier to cite examples of these practices than to quantify them.

Révész and Zalai conclude that the publication of data on Hungary's public finances must be improved to facilitate understanding of the system and analysis of further reforms. They also recommend extensive training of public officials to equip them to manage a Western-type public finance system during a period in which the state's economic role will remain important.

Taxes and Subsidies in the Transforming Hungarian Economy
Tamás Révész and Ernö Zalai

Discussion Paper No. 696, June 1992 (AM)