Hungary: Modernizing the subnational government system

This paper discusses key findings and policy proposals for modernizing Hungary's subnational government system. It looks at fiscal decentralization, local capacity building, and the development of a competitive credit market. Hungary has been a pioneer in local government reform among transition economies: it has decentralized the state administration, re-established the full autonomy of local governments, and tightened budget constraints. The public and private sectors are already bound to each other in supplying public services, and nongovernmental organizations are also undertaking a growing role in providing social services. Despite the recently reinforced intermediary levels of government, the very fragmented municipal system constrains public service efficiency and the capacity of subnational entities to absorb European Union funds. The efficiency and coverage of public services rely on restructuring public service delivery as well as restructuring both the current and capital grant systems. Increasing local revenues-local taxes like the value-based property tax-is a key factor in meeting the demand for local services and in enhancing accountability and creditworthiness. Augmenting local capacity in strategic planning, and financial and asset management is key to effective fiscal management and efficient utilization of EU funds. Enhancing local capacity is also a key factor in improving the ability of various subnational entities to absorb private debt and equity.