President of the Hungarianstate Audit Office
Dr. prof. Árpád Kovács
President of the HungarianState Audit Office
Ladies and Gentlemen,
At previous ICGFM Conferences I had an opportunity to present the role, possibilities and achievements of Supreme Audit Institutions, including the State Audit Office of Hungary, in the fight against corruption. In this respect, all were agreed that the transparency and accountability of state operations and public finances are also key pre-requisites for a successful fight against corruption. Needless to say, these correlations are still important for me, but given this opportunity, I would like to bring in further aspects in order to shed light on these questions. Transparency and accountability are criteria for state operations and public finances, since these are destined to promote democracy and the rule of law, the extension of which contributes to a modernised and competitive nation and production sector.
The International Organisation of Supreme Audit Institutions (INTOSAI), specifically its Governing Board which is now working in co-operation with the State Audit Office of Hungary, spares no efforts to promote transparency and accountability, which also serve to enhance the safety of global co-operation. This has become vital for Hungary, a country developing as part of the European Union, because 15 years ago the radical changes brought about by the political transition in Hungary, were triggered by the lack of transparency and accountability of the Soviet-type party state.
Firstly, this presentation sets out to analyse transparency and accountability in public finances and the public sector, as general and theoretical requirements for good (corporate) governance.
The 2. slide shows you the main context of the good governance.
In this presentation, see slide 3., I will first list some definitions and criteria to help you understand what people and public finances in Hungary have achieved. The second, and longer part of the presentation will address our achievements and challenges.
Ladies and Gentlemen,
- Accountability means being able to identify public figures and call them to account for their acts.
- Transparency means the public having the possibility to access reliable, relevant information about governmental activities.
Transparency allows such as taxpayers and entrepreneurs, an insight into the work and structure of the government as well as its political intentions and financial-economic undertakings. This is crucial for holding officials responsible and calling them to account for their decisions and acts. In discussing transparency and accountability within the public sector, as slide 4 shows,we may ask, four questions:
- Who should be called to account?
- What should they account for?
- To whom should they be accountable?
- How should they be called to account?
As expected from government, transparency means, as slide 5. shows:
- Roles, competences and responsibilities must be clear.
- Information must be made widely available on a public basis.
- Budget preparation, execution, and reporting must be open.
- Fairness in management must be ensured.
The enforcement of accountability presupposes a transparent system. The two criteria are inseparable. As slide 6. shows, the concept of accountability is divided into vertical and horizontal. Vertical refers to the pyramid of government structure, horizontal refers to the relation between government and legislation and the public, the society.
Ladies and Gentlemen,
These questions lead us to our main issue, i.e. how the two vital criteria work in reality, and to what extent they are actually enforced in Hungary. I would like to continue by presenting our experience with the enforcement of transparency and accountability in the face of two major challenges: the budget and public finances.
Hungary is now part of the European Union, where a fundamental requirement for co-operation is appropriate internal and external transparency, and where officials must systematically account for the lawful and efficient utilisation of the external resources received.
The compliance with the duties involved in EU membership is proof that Hungary has attained considerable successes in the enforcement of both basic criteria as I mentioned.
The awareness of the challenges facing us is a pre-requisite for progress and the elimination of current deficiencies. To put it differently, in order to make improvements, we can afford to focus on our regulatory, organisational and operative difficulties in the way of efficient public finances, and hence national competitiveness.
In this presentation I would like to focus on three areas which, in my view, greatly contribute to progress and improvement. These are, as slide 7 says:
- The definition of public duties;
- Budget funding;
- The enforcement of Parliament’s budget right.
I would like to emphasise, the duty of the state as a fundamental element of financing.
To my knowledge, Hungary is not the only country where laws on public finances fail to explain in detail what the state’s duties are, what their scope is, and hence why public finances cover, and why to that extent, the particular duties and subventions. In other words, why and why exactly do “state operations” refer to what they refer to, and what does the requirement for transparency and accountability mean in this context?
Needless to say, there are a number of states which lack very specific regulations, yet are capable of operating satisfactorily, thanks to democratic common law, which has been in place for centuries. However, the situation in Hungary is still different. We identified reforms with financial modernisation and institutional changes, rather than the redefinition of our responsibilities. In other words, we have focussed on the how and who, rather than the what and why. This is a major reason for our current weaknesses. The successive campaigns to reform public finances have yielded scarce results because we have systematically failed to clarify public duties and the extent of state involvement.
Though probably not unique to Hungary, this problem invites more detailed reflection. There is no need to know concrete budget figures or the processes of budget planning and execution to see that the problem is not the absence of a legal framework. Instead – as we shall see – the opposite is the case: the present laws, from a conceptionally questionable starting point, confuse cause and effect.
The Hungarian Constitution, as slide number 8 says, determines the duties of our Government. The financing process in Hungary now determines the tasks, and hence accountancy requirements and rules, while seldom clarifying the professional contents. Moreover it does so in an inconsistent manner: at times in too much detail, at times with a broad brush approach.
Our audit experience has shed light on number of problems caused by the unclear definition of tasks, and hence the structural defects of the system. Obviously, efficient funding with transparent processes calls for the statutory definition of tasks. The clarification of the contents and scope of the state’s tasks has become a cornerstone of the modernisation of public finances because it is now evident that the state’s tasks for the future must no longer be identified with those currently being financed.
A vital need now in Hungary is to reconsider public duties (primary and secondary education, health care, assistance for the elderly and the handicapped, etc.) and, in my opinion, to give them a more specific definition. This could start a number of processes to promote transparency and accountability in budget planning, business, and accountancy.
Dear Colleagues,
Let me speak about budget findings. The previous considerations, as I have tried to point out elsewhere, are not to suggest that until public duties are reconsidered and the modernisation of public finances is specified, financing may be ignored. In this respect, we are better off with the issues of how, who, and which organisation. See slide 9.
To date the most important measure to reform finances has been the establishment of the Paymaster Office, incorporating the information system of regional public finances.
This gave rise to a modern and efficient organisation saving considerable funds for the central budget. This change was twofold: the formerly multistage funding organisation became centralised, while the elimination of follow-up and net funding in the field of funds management solved all the problems that had been revealed by audits in central and local budget institutions.
Budget appropriations contain an increasing number of targets and what are called program-financed tasks. At the same time, these have been unable to entirely complete their function from the point of view of their being utilised, mostly owing to poor distribution. This is also demonstrated by the sometimes considerable appropriation surplus for professional programs, targets and support appropriations. But the problems basically point to the undefined contents.
Government decrees to revise institutions and their respective responsibilities have been around for over ten years. Even though governments and outer circles as well as auditors have wished to narrow down public duties, no systemic change has been achieved. The reason, according to our audits, is the haphazard manner of conducting revisions. So far these changes have taken place as forced measures without long-term impact analyses, in-depth studies and clear ideas, and as a consequence of other budgetary restrictive measures, often for lack of funding resources. Hard-pressed by the prevalent conditions and short-term funding interests, the financial administration has invariably answered the questions from what resources, how and by what means, rather than what and why (contents).
A high proportion of the profusely and inconsistently defined state tasks inherited from previous decades in Hungary are performed by municipal and rural authorities, overwhelmingly through the subventions redistributed from the Central Budget. The almost unlimited scope of redistribution is a major stumbling block standing in the way of transparent and accountable public finances. Local revenues are strongly centralised, while expenditure funding is distributed among institutions that are extremely decentralised for such a small country.
I am convinced that Hungary’s problems are shared by other countries. A pre-condition for reform is the exact definition of state tasks and services, whether free or subject to payment, to identify activities subject to public funding. The latter have not been made properly clear, and the state tasks have not been determined precisely enough in terms of their content.
The reform of the public financing system, just like the problems and tensions of the financial system, is not linked to funding. In the current system of budget management, budget planning is essentially based on the existing appropriations. For this reason, funding is generally based on these rather than the set objectives. Thus, the necessarily generalised tensions are merely consequences. Funding problems are just the tip of the iceberg. Deep down there are undefined contents and state tasks with an unclear nature and scope.
Ladies and Gentlemen
I am to say some sentences of the enforcement of the Hungarian Parliament1s budget right. It is common knowledge that a typical democratic and constitutional state assigns to Parliament two fundamental rights concerning public finances: budgeting and the approval of the Closing Report. Hopefully, my previous points have made it clear that the proper transparency of state operations and the accountability of public institutions are a sine qua non for Parliament if it is to carry out legislation and supervision effectively regarding those two basic rights.
As happens in a number of other countries, the budget right is embodied in Hungary in what are called the Budget Acts. In Budget Acts the decision-making representative bodies authorise the performance of duties within the budget, stipulating the obligations of budget executors.
Pursuant to the Hungarian Constitution, the Central Budget shall be drawn up by Parliament, the supreme state and representative organ of the Republic of Hungary. Thus, the budget right is assigned to Parliament, as it is in other countries. The basic principles of procedure are set out in the Constitution, while the details are described by the Public Finances Act. The Act places an obligation on Government to present its budget proposal in a transparent and intelligible way for Members of Parliament.
The proposal containing the Budget Bill also sets out priorities for the year in question. The Budget Act itself breaks down budget revenues and expenditures by chapters and funds, with special regard to social security funds (health care and pensions), as well as treating them in their entirety. In addition, the Act contains the revenue and expenditure balance, the deficit and surplus, and funding for budget deficit. During budget execution the appropriations are amended in accordance with a separate procedure.
In the following, I would like to address two issues, presumably crucial in other countries as well, that negatively affect—as shown by the SAO’s experience—operative transparency and accountability. In this context, I am going to present existing risks for the enforcement of the Hungarian Parliament’s budget right, which need to be eliminated.
These include the unambiguous and transparent justification and definition of appropriation amendments and priorities. See slide 10.
Speaking on the amendments, I should say that Government, Ministers and Chief Executives of the institutions reporting to Ministries have a possibility, as far as is allowed by the relevant laws, to amend and regroup appropriations defined in the Budget Act.
However, this solution for the flexibility of budget management may only be effective and proof against further transparency and accountability risks, mainly for practical reasons, subject to appropriate approval and information discipline, a financial report suitable for comparing plan and fact as well as a high-standard financial supervision.
On the other hand, budgeting has undergone other, mostly essential, changes. What warrants these is the systematic mismatches between budget appropriations and actual facts. The Budget undergoes interim amendments, even several times a year. In addition, despite the SAO’s repeated warning, the effective laws still allow for amendment while Parliament lacks a deep insight into the differences in revenues and expenditures in what are called supplementary budgets, and it cannot demand a correct explanation from the Government. Naturally, such limited transparency and accountability cannot guarantee the appropriate fulfilment of the amended appropriation.
The existing, annually recurring problems are related to budget planning. The expected revenues are systematically adjusted to the required expenditures, with a “great risk” in terms of their achievement expected by the SAO. The reason is that at least at the level of initial “pivotal figures”, the European Union’s nominal convergence criteria, such as the expected level of deficit in proportion to GDP, are to be maintained. However, the “underachievement” of revenues inevitably results in indiscriminate cost cuts, although expenditure often exhibits a considerable surplus as opposed to the appropriations. This generates management disorders, limits transparency and accountability, and may even result in a loss of confidence in international co-operation. Ultimately, all this is due to the unclear contents of state tasks. In this sense, Parliament can only exercise its budget right in a limited way.
Finally, I am to speak on the execution of priorrities. In recent years, the priorities of budget policy have covered areas which are too broad. By definition, their high number has prevented the identification of focal points and the simple transparency of funding. (At times as many as ten to fifteen areas were prioritised, which made virtually the entire budget a “priority”, and hence execution was questionable at the very beginning.) Accountability was uncertain because these priorities were not defined in an adequate structure within the annual Budget Acts. The general objectives were not specified through expected outcomes or measurable outputs. Whenever the Budget Act was approved, no information was available on the expected utility of the planned expenditures. Because of a lack of the appropriate data and information, Parliament could merely discuss the actual appropriation amounts, rather than the possibility for any planned appropriation to ensure the achievement of a specific objective. This is tantamount to saying that transparency and accountability require the greatest consistency and commitment in this area, i.e. the questions “What matters most?” and “Why?”.
Ladies and Gentlemen, Dear Colleagues,
Hopefully, I have managed to present our achievements and the great deal of work which still lies ahead. We have seen the considerable need for adequate, consistent and unequivocal laws with public institutions capable of executing them, in order to duly enforce transparency and accountability. See slide 11.
Public finances in present-day Hungary still need extensive improvement. The reform of public finances is inevitable both in terms of structure and contents and in terms of the framework legislation.