HUNGARY

Hungary is a parliamentary representative democratic republic. The country has a unicameral parliament composed of the National Assembly, whose members are elected every four years by direct universal suffrage. The head of state (the President of the Republic) is elected indirectly by the Parliament for a five-year term, and the head of government (the Prime Minister) is appointed by the President for a four-year term.

The 1989 Constitution, which amended the 1949 Constitution, recognised the principle of local self-government, dedicating one full chapter to subnational governments. A strong decentralisation process started with the 1990 Act of Local Government, which defined the communes’ right to self-government and restored the autonomy of municipalities and counties. Local governments were given broad responsibilities and autonomy in terms of financial management.

A new Fundamental law was adopted in April 2011 and enforced on 1 January 2012, which pronounced the 1989 Constitution to be null and void. This development meant the start of a recentralisation process. Provisions concerning local governments are provided in Art. 31 to 35 of the Fundamental Law. It determines the essence of subnational governments, the county and local governments, established “to administer public affairs and exercise public power at a local level” (Art. 31). No explicit mention is made of the principle of local self-government, although Art. 32 states that in the management of local public affairs and within the framework of the Acts, local governments shall adopt decrees, make decisions and autonomously administer their affairs. Art. 32 also indicates that local governments determine the rules of their organisation and operation, exercise the rights of ownership with respect to local government property, determine their budgets and autonomously manage their affairs on that basis, deciding on the types and rates of local taxes.

Following the new constitution, a Cardinal Law on Local Governments was enacted in 2011 (Act CLXXXIX of 2011) to define a new multi-level governance framework. The law recentralised several local responsibilities and resources and strengthened the central government’s oversight of legal compliance and administrative functioning of SNGs. This was reinforced by the launch of an important State Territorial Administration Reform (STAR) in 2010, which reorganised the jurisdictional, organisational and human resource foundation of public service delivery at all levels of the public sector in Hungary. In particular, the STAR reform introduced a new deconcentrated administrative structure in the form of 175 townships (járás), including three districts in the capital, in charge of state-administrative tasks. Townships took over many functions previously exercised by municipalities, and are also in charge of the legal and financial supervision of SNGs. Public utilities (e.g. electricity, gas, waste management, heat supply) were also nationalised.

In 2019, the government launched the Long-Term Programme for Converging Municipalities (PCM) for the most disadvantaged municipalities (implemented in 31 municipalities in 2019, 37 additional in 2020 and around 51 in 2021). The programme aims at providing assistance in building renovation, education and health services in small municipalities, based on their local needs. Since 2021, the programme has focused on improving local living conditions (e.g. improving public services in rural small municipalities, developing medical services, community spaces).

TERRITORIAL ORGANISATION
MUNICIPAL LEVEL	INTERMEDIATE LEVEL	REGIONAL LEVEL	TOTAL NUMBER OF SNGs (2021)
3 178 municipalities (települési önkormányzatok)		19 counties (megyék) + Budapest
Average municipal size: 3 068 inh.
3 178		20	3 198

OVERALL DESCRIPTION: Hungary is a unitary country with a two-tier subnational governments system, made up of 19 counties, in addition to Budapest, and 3 178 municipal authorities as of 2020, with no hierarchical link. Both counties and municipalities are governed by councils composed of representatives (councillors) directly elected through secret ballot for four-year mandates. County councils are led by a council President, elected from amongst its members. Municipal councils are headed by mayors (polgarmester), who are municipalities’ executive body, elected by direct universal suffrage for a four-year term.

REGIONAL LEVEL: The regional level is organised in 19 counties, which were restored in 1990, and the capital-city of Budapest, which has a special status similar to that of a county. Counties are very heterogeneous both in terms of population and of area. While the average size of counties is around 486 500 inhabitants, the least populated county had around 188 000 inhabitants in 2021 (Nógrád), compared with the two most populated, Budapest (1.72 million inhabitants) and Pest (1.31 million inhabitants). Hungary has high regional disparities in GDP per capita, with the Northern Great Plain lagging behind and Central Hungary leading the way. Regional economic disparities have increased moderately since 2000.

Budapest has a special status since 1991 set out in the Local Government Act, and thereby has a two-tier organisation similar to that of a county with the capital city and 23 city districts (kerület). Both levels function in the same way as municipalities, with a mayor and local councils elected by direct universal suffrage. Each district has a council and each city district has a mayor. The capital city has a Lord Mayor and a capital city assembly of elected representatives.

MUNICIPAL LEVEL: The municipal level in Hungary is highly fragmented, comprising the capital city with its 23 individual districts, 2809 villages (kozsegek), 322 towns (varosok) and 23 cities with county status (megyei jogu varos), conferred to towns that were county seats in 1990 and cities with more than 50 000 inhabitants if they request this status to the Parliament. Cities with county status are in charge of the responsibilities of the county in their area. They can form city districts with full legal status and establish city district offices.

Hungarian municipalities have an average size of 3 604 inhabitants (vs 5 960 in the EU and 10 250 in the OECD and a median size of 800 inhabitants. In 2021, 90.7% of municipalities had fewer than 5 000 inhabitants, and even 75.8% less than 2 000 inhabitants.

HORIZONTAL COOPERATION: The Cardinal Act on local government of December 2011 set 2 000 inhabitants as the critical threshold for local administration. It does not force mergers but stipulates that small municipalities under 2 000 inhabitants should group their administrative services into joint offices or districts or micro-regions. The purpose of the reform was to ensure sufficient administrative and human capacity in small settlements without merging municipalities or restricting municipal autonomy. As of 2021, there were 738 joint offices operating across Hungary, with 82.6% of municipalities involved in one of them. In addition to these joint offices, Hungary had 1 517 local government associations in 2021, comprising around 11 000 members. Inter-municipal cooperation has been encouraged since the 1997 Act on the Associations and Co-operation of Local Government.

STATE TERRITORIAL ADMINISTRATION: The State deconcentrated administration at the territorial level was reformed in 2010 as part of the STAR reform. The former administrative entities were integrated into county government offices (or in case of Budapest: district government office). The 20 largest government offices, which form the largest units of territorial administration, operate in county seats and in Budapest. They coordinate and promote the territorial implementation of government tasks in accordance with legislation and government decisions. District (metropolitan district) offices are the smallest unit of territorial administration in 174 cities and 23 districts in Budapest. Their basic task is to manage first-level administrative cases (under the county level).

The 2012 Constitutional reform and the Cardinal Law on Local Governments have profoundly transformed SNGs in Hungary, reducing their scope, functions and financing resources. It recentralised several (or parts of) functions in education (primary and secondary education), healthcare (free medical services, hospitals, excluding specialised clinics), social protection (social allowances for the elderly, families, etc.), public hygiene, water works, and administration (document office duties). Counties lost several major competences (healthcare including hospitals, social initiatives and secondary education) to be mainly in charge of regional and territorial development, as detailed in the National Development and Territorial Development Concept (EU programming period 2014-2020), which makes them key actors of territorial development. Municipalities are no longer in charge of primary education but they keep several responsibilities in areas such as health care, social protection, environment, housing, community amenities and utilities, culture and sports.

Main responsibility sectors and sub-sectors
SECTORS AND SUB-SECTORS	Regional level	Municipal level
1. General public services (administration)	Coordination tasks (regarding municipal service provision)	Internal administration; Administrative tasks; Issuance of various permits
2. Public order and safety
3. Economic affairs / transports	Regional development; Rural development	Road maintenance; Public transport
4. Environment protection		Environmental health; Waste management; Public parks
5. Housing and community amenities	Land-use planning	Land-use planning; Cemeteries; Street lighting; Maintaining and cleaning of public areas; Parking garages; Housing and property management
6. Health		Primary healthcare; Health protection
7. Culture & Recreation		Public library services; Performing art organisations; Protection of local cultural heritage
8. Education		Support to local community education
9. Social Welfare		Children protection support; Social provision tied to local government ordinances

Scope of fiscal data: county governments, municipalities, associations of local governments and local minority governments.

SNA 2008

Availability of fiscal data: High

Quality/reliability of fiscal data: High

GENERAL INTRODUCTION: Despite the political autonomy of local governments, the Hungarian public governance system is quite centralised on the fiscal side. Following the 2008 economic crisis and critical state of subnational finance in Hungary prior to 2010, the national government undertook - in 2011 - an extensive constitutional reform leading to the recentralisation of resources, responsibilities and related expenditure, and debt. While municipalities have kept some local responsibilities and can levy their own resources through specific local taxes, the counties are now deprived of any “general competences” and have been gradually excluded from the governance framework. At the same time, the development of a deconcentrated township system reinforced the financial influence of the central state.

Subnational government expenditure by economic classification
	Dollars PPP / inhabitant	% GDP	% general government	% subnational government
Total expenditure	2 150	6.5%	12.5%	100.0%
Inc. current expenditure	1 587	4.8%	11.8%	73.8%
Compensation of employees	738	2.2%	20.5%	34.3%
Intermediate consumption	641	1.9%	22.2%	29.8%
Social expenditure	29	0.1%	0.7%	1.4%
Subsidies and current transfers	172	0.5%	8.9%	8.0%
Financial charges	2	0.0%	0.3%	0.1%
Others	5	0.0%	16.4%	0.2%
Incl. capital expenditure	563	1.7%	15.1%	26.2%
Capital transfers	51	0.2%	4.0%	2.4%
Direct investment (or GFCF)	512	1.5%	20.9%	23.8%

EXPENDITURE: As a result of the recentralisation of a large part of SNG responsibilities under the Local Government Act, the share of SNG expenditure in GDP and public expenditure decreased significantly from 2010 to 2020 to stand in 2020 well below the OECD average (amounting to 17.1% of GDP and 36.6 % of public expenditure) and the EU27 average (18.3% of GDP and 34.3% of public expenditure). The share of SNG staff spending in total public staff spending went from 50% in 2010 to 20.5% in 2020, resulting from large transfers of personnel from SNGs to the new deconcentrated government offices.

DIRECT INVESTMENT: Following the global crisis and the recentralisation reform, the share of SNGs in public investment has continued to decrease, from 59% in 2011 and 27% in 2016 to 20.9% in 2020, well below the OECD average (54.6% of public investment) and the EU27 average (54.4%). As a share of GDP, SNG investment also decreased from 2.2% of GDP in 2010 to 0.8% in 2016 and recently increased to 1.5% in 2020, thanks to higher emphasis on infrastructure investment.

In 2019, most SNG investing was dedicated to general public services (27.9%) and economic affairs and transport (23.4%), as well as recreation and culture (16.9%) and environmental protection (14.5%). Hungary aims to increase infrastructure investment in several domains (e.g. education, transport). As part of its infrastructure development programmes, the Modern Cities Programme provided around HUF140 billion in 2020 and 2021 to increase investment on school renovation in rural small and medium municipalities, sport facilities and equal access to digital education. The programme also aims to increase investment in motorways, railway and to connect region centres to high-speed road network. Hungary extensively uses public-private-partnerships (PPPs) to finance infrastructure at the national level, while SNGs’ recourse to PPPs remain restricted.

Subnational government expenditure by functional classification
	Dollars PPP / inhabitant	% GDP	% general government	% subnational government
Total expenditure by economic function	2 296	6.8%	-	100.0%
1. General public services	598	1.8%	19.3%	26.1%
2. Defence	0	0.0%	0.0%	0.0%
3. Security and public order	13	0.0%	1.8%	0.6%
4. Economic affairs/transports	465	1.4%	16.0%	20.3%
5. Environmental protection	100	0.3%	59.1%	4.4%
6. Housing and community amenities	164	0.5%	42.3%	7.1%
7. Health	95	0.3%	3.5%	4.1%
8. Recreation, culture and religion	284	0.8%	25.8%	12.4%
9. Education	326	1.0%	17.8%	14.2%
10. Social protection	251	0.7%	5.6%	10.9%

Main categories of SNG spending in 2019 included general public services (26.1% of SNG expenditure), followed by economic affairs/transport (20.3%), allocated in particular to regional development, road maintenance and public transportation. The sectors in which SNGs play the biggest role are environmental protection (59.1% of public spending in this area) and housing and community amenities (42.3% of public spending in this area). The responsibilities of counties on matters related to health, education, social protection and culture have been continuously narrowing since the 1990s, as these tasks have been further centralised. As a result, the shares of SNG spending in education, health, housing and community amenities, recreation and culture and environmental protection have sharply decreased since 2011.

Subnational government revenue by category
	Dollars PPP / inhabitant	% GDP	% general government	% subnational government
Total revenue	2 168	6.5%	15.0%	100.0%
Tax revenue	628	1.9%	7.6%	29.0%
Grants and subsidies	1 270	3.8%	-	58.6%
Tariffs and fees	249	0.8%	-	11.5%
Income from assets	18	0.1%	-	0.8%
Other revenue	5	0.0%	-	0.2%

OVERALL DESCRIPTION: The administrative reforms led between 2011 and 2014, carried out in the name of the reallocation of tasks between local and central levels and costs savings, restrained the fiscal framework for local government financing. The main source of revenue is grants and subsidies, accounting for 58.6% of SNG revenue in 2020, well above the OECD average (41.2%) and the EU27 average (46.6%). As a result, the share of tax in SNG revenue is small, below the OECD and EU averages (respectively 42.4% and 40.1%). Municipalities are the only SNG entities able to levy taxes. However, since Covid-19 legislation of 2020 (Act LIX), counties are allowed to impose local taxes on “special investment zone”. Investment zones are established by government decree in the territory of one or several municipalities, if the economic activity within the area is significant and has a relevant effect on the county’s economy. The tax imposed by the county replaces the respective tax set at the municipal level. Only one “special investment zone” has been created by decree so far in the area of Göd (government decree 294 of 2020). Tariffs and fees provided substantial additional revenue in 2020 (11.5% of SNG revenue), slightly above the EU27 average (10.3%).

TAX REVENUE: While tax revenue accounted for 29.0%% of SNG revenue in 2020, the share of SNG tax revenue in public tax revenue and in GDP was well below the OECD average (respectively 32.3% of public tax revenue and 7.2% of GDP in 2020) and the EU27 average (27.1% of public tax revenue and 7.2% of GDP).

Municipalities receive - almost exclusively - own-source taxes, the main local tax being the local business tax (LBT), which amounted to more than 80% of municipal tax revenue in 2020. This tax is imposed on companies located or registered in the municipal area and based on corporate gross margins. The rate is determined by the municipality but capped at 2%. To sustain local companies during the pandemic, the maximum rate was halved to 1% in 2021 for SMEs with less than HUF 4 billion in revenue or balance sheet total and for self-employed persons. The LBT is the third largest income-generating tax at the national scale in Hungary and plays an important role in financing of local governments. The government compensated small municipalities with less than 25 000 inhabitants for the loss of revenue related to lower cap on LBT rate. For larger municipalities, the government provided support on a case-by-case basis. Since 2019, municipalities have also had the possibility to introduce LBT exemption or relief to local companies to promote investment projects carried out within their territory.

Property tax is the second highest tax received at the subnational level. Regardless, it has a relatively small role in Hungary compared to other OECD countries. Municipal property tax revenue accounted for 17.3% of municipal tax revenue in 2020 and 5.0% of SNG revenue. It amounted to 0.3% of GDP, well below the OECD average of 1.0% of GDP in 2019. Recurrent taxes on immovable property levied by municipalities include a building tax (around 13% of municipal revenue) and a land tax, both paid by owners and based either on area, floor space or on the adjusted market value. As the tax base typically does not depend on market value, revenue from property taxes remain low despite increases in property prices. Tax rates are set by each municipality up to certain limits based on the consumer price index. It also includes a communal tax on households (maximum rate of HUF 17 000) and a community tax. The number of municipalities levying a building tax, land tax and communal tax has grown. Other minor taxes include a municipal tourist tax and an environmental protection charge. The vehicle tax, which used to be a shared tax with the central government, has been fully centralised since 2020.

GRANTS AND SUBSIDIES: The 2011 constitutional reform modified the grants system and reduced their amounts, in accordance with the recentralisation of several local government responsibilities. Grants and subsidies amounted to 58.6% of SNG revenue and 3.8% of GDP in 2020. As such, funds transferred from the Health Insurance Fund decreased sharply.

A stricter grant system was established in 2013, shifting from an income-based system of block grants, to a task-based, expenditure-oriented system of earmarked grants for each local authority. Grants are now earmarked, for the majority to current expenditure (62.3% of total grants) and mainly in the fields of education, social protection and culture. The reform included the tightening of distribution rules as well as new equalisation criteria based on the tax capacity of each municipality, with the aim of assisting poorer regions, due to striking differences between local governments in terms of local business tax capacity. Thereby, some of the municipalities with low tax-income capacities receive a grant supplement. A mandatory deficit grant was also designed to cover municipal deficit. Overall, state funding may be granted twice a year to municipalities in peril, and grants are voted yearly by the Parliament.

OTHER REVENUE: Other revenue sources for municipalities include mostly user tariffs and fees for public services, which represented around 11.5% of total subnational revenue in 2016, against 14.9% on average in OECD countries but 11.6% in the EU27. Income from property is quite limited, below the OECD and EU27 averages (respectively 2.0% and 1.2% of SNG revenue).

Subnational government fiscal rules and debt
	Dollars PPP / inh.	% GDP	% general government debt	% SNG debt	% SNG financial debt
Total outstanding debt	779	2.3%	2.4%	100.0%	-
Financial debt	191	0.6%	0.7%	24.5%	100.0%
Currency and deposits	0	-	-	0.0%	0.0%
Bonds / debt securities	1	-	-	0.1%	0.3%
Loans	190	-	-	24.4%	99.7%
Insurance pensions	0	-	-	0.0%	-
Other accounts payable	588	-	-	75.5%	-

FISCAL RULES: Tighter budgetary restrictions and new borrowing controls were introduced for SNGs in 2011 by the Cardinal Local Government Law, as part of efforts to reduce the national public debt. It forbids any operating deficit and stipulates that SNGs are responsible for their own financial management. However, there is no national stability pact agreement between the central and local levels.

DEBT: The Cardinal Local Government Law set up an authorisation framework for local borrowing in 2012. Following the 2013 reform, the total debt of Hungarian local governments that accumulated from 2002 to 2008 was taken over by the central government and consolidated in full between 2011 and 2014. It was done progressively in three stages based on the size of SNGs. The ratio of debt to be taken over was determined on the basis of the number of inhabitants in a particular municipality and the taxation power measured by the local business tax. As a result, the amount and structure of outstanding debt profoundly changed, SNG debt accounted for 2.3% of GDP in 2020 compared to 4.5% in 2010 and 2.4% of public debt, which is well below the OECD and EU27 averages (20.2% and 15.4% respectively). SNG debt is made up of other accounts payable for 75.5% (commercial debt, arrears), the remaining part being financial debt (“Maastricht debt”). Financial debt is almost exclusively composed of loans (99.7% in 2020), the share of bonds being marginal (0.3%). No green bonds have been issued at the SNG level.

TERRITORIAL MANAGEMENT OF THE CRISIS: The Covid-19 crisis was managed centrally, following years of recentralisation in the country. The Parliament passed a law in March 2020 to provide the government with the right to rule by decree. A state of emergency was implemented indefinitely. The central government established an “operational Group Responsible for Containment of the Coronavirus Epidemic” in January 2020 in order to coordinate the measures to be implemented by public entities in response to the pandemic. Lockdowns and restrictive measures were also decided at the national level (e.g. closure of non-essential shops, suspension of non-essential services, closure of schools, evening curfews, wearing of masks), although the government launched an online public consultation in February 2021 on the possible timetable to lift restrictions. A “Vaccination Working Group,” appointed by the “”Operational Group,” was in charge of monitoring vaccination progress and vaccines delivery.

EMERGENCY MEASURES TO COPE WITH THE CRISIS AT THE DIFFERENT LEVELS OF GOVERNMENT: No measure at the subnational level could be identified as they have mainly been done by the central government. The central government implemented a package of measures were implemented to support companies and households, which were coordinated by the Ministry of Finance (e.g. tax reliefs for selected activities, tax deferrals, cancellation of the tourism development fee for small entrepreneurs). Restaurants, hotels and tourism companies were also exempted from social contributions and the state granted wage subsidies to all businesses that had to close during lockdowns. Additionally, state interest rate subsidies, loans and guarantees were provided for up to HUF 2 000 billion (e.g. the Interest-free Restart Fast Loan launched in March 2021). The Investment in the Future Fund and Covid Fund were created along with National Research, Development and Innovation (NRDIO) Funds to support the management of the pandemic and its adverse effects. On the health side, the government launched the Health Industry Aid Programme to develop the production of pharmaceutical and medical products and to digitalise healthcare services.

The central government cut the local business tax by half in January 2021 to support local SMEs (rate capped at 1% from 2%). By contrast, little was done by the central government to support SNGs. It will compensate municipalities with less than 25 000 inhabitants for the revenue loss from the business tax, and on a case-by-case basis for larger municipalities.

IMPACTS OF THE CRISIS ON SUBNATIONAL GOVERNMENT FINANCE: SNGs were hit by the pandemic with high disparities among regions. The crisis mainly impacted industrial and export-oriented regions (e.g. northern and central parts of Transdanubia, the Dunaújváros district, some districts in Budapest). Subnational revenue declined by 6.8% in 2020 compared to 2019, mainly driven by the fall in taxes (-15%), followed by tariffs and fees (-16.1%). Municipalities were the most affected with a large drop in the local business tax, although the government compensated the smaller municipalities for halving the business tax rate to 1%, and on a case-by-case basis for larger municipalities. The property tax and parking fees also sharply decreased. Additionally, the previously shared vehicle tax was removed by the central government to support households. The decline in tax revenue and fees was not compensated by higher state transfers, with grants and subsidies being almost stable between 2019 and 2020.

On the expenditure side, SNG current spending decreased by 8.3% in 2020 due to the closure of public facilities and cancellation of events, and by 10.1% for capital expenditure. Given the limited role of SNGs in the management of the pandemic and the tight control of their finance by the central government, subnational debt declined by 15.5% in 2020 compared to 2019, of which a 8.3% decline of borrowings.

ECONOMIC AND SOCIAL STIMULUS PLANS: Hungary is one of the main beneficiary of EU funds. As part of the NextGeneration EU recovery instrument, the country should receive EUR 18.1 billion between 2021 and 2026 from the Recovery and Resilience Facility (RRF), of which EUR 7.2 billion are grants and EUR 9.6 billion are loans, although the government renounced to the loan facility. The RRF aims to promote green and digitalised economic recovery in response to the pandemic, which includes some projects at the subnational level. Additionally, the country will receive EUR 0.9 billion from the NextGeneration’s REACT EU programme to boost its economy.

Within its national recovery and convergence plan, drafted in line with the RFF, Hungary aims to allocate one third of RRF grants to improve primary healthcare and to digitalise its healthcare services. A quarter should be used to develop railway systems and reduce CO2 emission through the development of electrification and urban public transport, sectors where SNGs have responsibilities. A fifth of the fund will be devoted to education (e.g. digital transition, training, research in universities). The remainder is set to be allocated to promote the green transformation of the economy, notably waste and water management. A smaller portion of the fund should be used for regional development programmes in the most vulnerable municipalities to support social housing conditions.