Exposé of Dr. László Windisch, President of the State Audit Office of Hungary, held in front of the National Assembly on 23 November 2022 on Audit on the Execution of the 2021 Public Budget of Hungary.
Dear Members of the National Assembly,
Dear Mr. Speaker of the National Assembly,
Dear Mr. Minister,
The Fundamental Law of Hungary defines the execution of the central budget as the first task of the State Audit Office of Hungary. This is the task by which the State Audit Office of Hungary, as the financial and economic audit body of the National Assembly, can most directly support the work of the National Assembly. In most countries, it is the duty of the Supreme Audit Institution to scrutinise hundreds of pages and millions of records of the final accounts prepared by the government, and to qualify whether the budget was executed properly and the accounts give a true and fair view of the execution of the Act on the Budget. This audit is the biggest task for the State Audit Office of Hungary every year, therefore we devote most of our resources to the audit of the final accounts. The audit was launched by the SAO in the second week of June, and by the time the report was completed, a total of 114 auditors had performed the task, spending about an overall of 4,800 working days on it.
Just as Supreme Audit Institutions all over the world, the State Audit Office of Hungary is also able to verify by sampling whether individual budget appropriations have been used properly and whether the report on this can be considered as reliable. International standards set out the method for selecting and evaluating samples to provide a reasonable assurance – in our case, 95 percent probability – whether the budget was executed properly and the accounts give a true and fair view of the processes. SAO’s audit methodology related to the final accounts was prepared by considering these international standards. The methodology has remained unchanged for years, which ensures that the State Audit Office of Hungary evaluates the data according to the same principles each year. The methodology is publicly available and can be downloaded from the website of the SAO. The applied statistical methodology ensures that any undetected errors do not reach the materiality threshold as a whole.
The audit included the evaluation of a total of 7,390 samples of revenue, expenditure s as well supporting statements of 141 audited organizations were evaluated. The expenditure items in the sample amounted to HUF 5,188 billion, while the revenue items totalled HUF 393 billion. This represented 17.4 percent of the total expenditure amount and 1.6 percent of the total revenue. The latter proportion is much lower because there is a wide variety of expenditure appropriations, while the majority of revenues are made up of a few dozen types of revenue of larger amounts (e.g. various taxes). These are characterized by the fact that they are made up of a large number of items, usually of low individual value, handled in an automated and standardized manner in the IT systems of the public budget. In these cases, the State Audit Office of Hungary audits the regular and reliable operation of the system itself, i.e. it is convinced of the reliability of the performance data in relation to randomly selected sample items by testing the actual operation of the built-in controls.
On the basis of the audit conducted using the method described, the State Audit Office of Hungary found that the appropriations presented in the bill on final accounts, the central and chapter-managed appropriations of the central subsystem of the public budget, the used data of the central budgetary bodies, the social security funds and the separate income of state funds and expenditure appropriations were reliable and their implementation was regular. The bill on final accounts presented the revenue and expenditure data in a true and fair view.
In addition, the State Audit Office of Hungary also audited the draft of the bill on final accounts sent by the Ministry of Finance by the statutory deadline from the point of view of whether it was prepared in accordance with the structure and content of the legal requirements. The SAO found that the structure and content of the bill complies with the legal requirements.
The audit also evaluated whether the public debt rule laid down in the Fundamental Law of Hungary was fulfilled in 2021. It was found that the value of the public debt ratio defined as the ratio of public debt to gross domestic product calculated in accordance with the law is 76.8 percent at the end of 2021, which is lower than the 79.3 percent at the end of 2020. Consequently, the public debt rule was met.
The requirements for the government sector’s GDP proportional deficit did not have to be met in 2021, as the European Union maintained the 2020 exemption clause in 2021 in order to manage the negative effects of the coronavirus pandemic. In the domestic legal system, the amendment to the Act on the Economic Stability of Hungary stated that the requirement on the extent of the deficit does not have to be applied in the 2021-2023 budget years. Thus, it cannot be legally objected that the government sector’s proportional deficit of 7.1 percent of GDP, calculated according to the EU methodology, exceeded the value of 3 percent of the so-called Maastricht criteria.
It was no coincidence, but a very conscious decision that both the competent body of the European Union and the National Assembly of Hungary granted exemption from the obligation to meet the strict deficit target. Maintaining the budget balance is not an absolute priority, as there are situations when, in order to protect the health of people, the safety of families, and the preservation of jobs, it is advisable, and even necessary, to increase the expenses serving this purpose to the detriment of the balance of the public budget. In 2020 and the first quarter of 2021, i.e. during the most serious period of the COVID-19 pandemic, this connection was obvious to everyone. However, after the pandemic was successfully contained, the question arose as to whether it would not be advisable to significantly reduce the debt accumulated during the pandemic with a strict budget policy. In addition to common sense, the international experience of the 2008-2009 global financial crisis also indicated that sudden fiscal consolidation may slow down the recovery from the recession and may even lead to another economic downturn. Therefore, it was justified to extend the exemption from meeting the strict deficit targets at both EU and national level.
Hungarian economic policy has also chosen the path of putting emphasis on stimulating the restart of the economy, even at the cost of assuming a larger deficit, and reducing the public debt ratio, which indicates the state’s indebtedness, not by curbing the growth of public debt, but by dynamizing economic growth. The bill laying in front of you clearly shows that this choice was successful, as the public debt ratio decreased by 2.5 percentage points in one year.
Dear Members of Parliament,
Dear Ladies and Gentlemen,
The question can be raised that if the State Audit Office of Hungary found the execution of the budget to be regular, how can the deficit be significantly higher than the deficit target set in the Act on Public Budget? Three circumstances made this possible. The first is that in 2021 there was a state of emergency for a long time, during which it was possible to deviate from the legal rules for public budget by means of a government decree.
The second is that, even under normal circumstances, the Act on Public Budget gives the Government broad authority to reallocate the appropriations included in the Act on Public Budget, or even establish new ones.
The third is that the number of appropriations in budget laws that can be exceeded even without legislative amendments is typically high. The State Audit Office of Hungary regularly drew the National Assembly’s attention to this as a risk during the formulation of opinion on the budget bills. I also consider that the large number of appropriations opened from above includes the risk of exceeding the budget deficit target, which can even be assessed as a serious risk in a normal economic situation. In an emergency situation, however, it justifiably increases the Government’s room for acting.
I note that the HUF 141 billion overspending of appropriated expenditure that can be exceeded without amendment accounted for only 3 percent of the cash flow deficit of the central subsystem. Consequently, exceeding the deficit target was basically made possible by the first mentioned circumstance.
Based on the above, it is more appropriate to seek an answer to the question of how much the budgetary policy chosen by the Government contributed to the successful restart of the Hungarian economy. Success is unquestionable. The 7.1 percent economic growth is the 8th highest growth rate among the member states of the European Union, and thus exceeded the level of the real value of GDP in 2019, which the 10 Member States of the European Union failed to achieve in 2021. It is an extremely positive result that the value of the employment rate was also higher at the end of 2021 than before the crisis in 2019.
The performance data of the three partial budgets of the central budget clearly indicates the role of the budget policy of 2021 in restarting the economy. Since 2017, the Bill on Public Budget has distinguished between the operating, domestic accumulation and European Union development partial budgets. This division makes visible the aspiration that a deficit in the central sub-system of the public budget should only be generated in order to achieve development goals, while the partial budget for financing operating expenses should remain in balance. The separation of the European Union’s development partial budget makes it transparent to what extent the revenues from the European Union related to Hungary, contribute to Hungary’s development. In addition, the balance of this partial budget also reflects how much the Hungarian budget advanced the EU revenues, which are typically disbursed retrospectively.
Data of the final accounts show that 82.1 percent of the nearly HUF 3290 billion overrun of cash deficit against the 2021 budgeted cash deficit was generated in the domestic accumulation partial budget. The higher-than-planned deficit in the EU development partial budget accounts for 6.7 percent of the total overrun. This implies that nearly 90 percent of the higher-than-planned cash deficit was due to additional development expenditure aimed at stimulating the economy’s recovery.
In 2021, there was also a shortfall in the operational partial budget, but due to an increase in expenditures that were clearly linked to the management of the pandemic and the restart of the economy. Against an overall operating deficit of HUF 360 billion, an additional HUF 313 billion was used to finance curative and preventive care. The Government opened a new appropriation called “Support for enhancing competitiveness necessary due to the COVID-19 pandemic”, from which HUF 110 billion was paid. These two items alone exceed the amount of the operating deficit incurred.
Development expenditure in the budget contributed to the 2021 investment rate even exceeding the 2019 rate, reaching a historic record of 27.2 percent. This has helped to preserve jobs and create new ones, so to the employment rate as well.
However, increasing budget spending is not a one-way street. Increase in investment rate and consumption resulting from this also increases budget revenues. Revenues of the central budgetary sub-system exceeded the amount originally planned in the Act on Public Budget by 10.2 percent in 2021.
Expansionary nature of fiscal policy in 2021 also contributed to continued dynamic economic growth in the first quarter of 2022, which could not be immediately interrupted by a sharp deterioration in external conditions. Consequently, the execution of the 2021 budget was not only regular, but also contributed to the successful recovery of the Hungarian economy.
Thank you for your kind attention!
Dr. László Windisch
President
State Audit Office of Hungary