Dealing with Exceptional Situations in Hungarian Fiscal Policy Regulation Presented by: Prof. Dr. NAGY Date: 15 – 16 February 2024 Rule-Based Or Discretionary Fiscal Policy - The effects are different in short and long-term: • Short run: higher public spending stimulates output and reduces unemployment, so that discretionary fiscal policy can reduce the effects of the economic crisis and promote economic growth • Long run: government debt reduces economic growth Challenges For Hungarian Fiscal Policy - The economic crisis has created a double challenge for fiscal policy on both the revenue and expenditure sides: • Revenue side: the crisis has led to declining tax revenues, rising unemployment, falling consumption due to underinvestment • Expenditure side: increase in expenditure as a result of increased subsidies Regulating Hungarian Discretionary Fiscal Policy - At present, public debt is well above the constitutionally prescribed level - Until the optimal debt level is reached, the Parliament has to adopt a budget aimed at reducing public debt - Factors affecting the management of public finances may be subject to exceptional situations, the remedy for which is allowed by the Constitution to derogate from the strict rules - The rule referring to economic crisis is interpreted in an expansive way by the Stability Law - It is stated that any case of a decline in the real value of annual gross domestic product in real terms shall be interpreted as a lasting and significant downturn in the national economy - In this case, the Stability Law allows the government sector deficit to exceed 3% of GDP and the public debt ratio to fall Areas Of Discretionary Fiscal Policy - Fiscal instruments can be divided into fiscal instruments affecting the revenue side of the budget and subsidy instruments affecting the expenditure side. - Some of these instruments have already been introduced in 2020, while others came into force from 2021 onwards and started to have an impact from then on. In terms of the mechanism of impact, support instruments have a faster impact on the economy, while tax instruments have a longer-term impact on economic agents, with some exceptions, such as the introduction of a new tax. Instruments Of Discretionary Fiscal Policy - The rules and measures taken to tackle the economic crisis in the context of the COVID epidemic can be broken down into a number of areas, such as job preservation and creation, support for priority sectors and domestic businesses, support for families, maintaining security of supply, the application of official prices, and extra profit taxes