Sustainable Development of the Functioning of Local

Self-government Bodies in Hungary in the Economic Aspect

Aleksandra G. Butenko

Peoples' Friendship University of Russia, Moscow, Russia

Keywords: Hungary Fundamental Law, Regions Local Government, Sustainable Development, Financial Framework,

Financial Development, Local Taxes, Income, Expenses, Regions Sustainable Development.

Abstract: The article is devoted to the local government bodies activities organization financial basis analysis in

Hungary and its sustainable development. The author studies the normative legal acts that directly regulate

the economic component of the local government functioning, which is directly related to the further regions

sustainable development. Special attention is paid to local taxes and fees, in particular, to the legal basis for

the local taxes regulation, the sources of local budgets income and the expenditure part, the situation regarding

the property that is owned by communities. Also, the local government financial component state in Hungary

is determined in accordance with the European Charter of Local Government standards.

1 INTRODUCTION

It is obvious that without the material and financial

conditions availability, it is impossible to fully

function any state institution, specifically, further

development. Especially if this institution is one of

the most important state constitutional system

foundations, local government. Without sufficient

funding, local governments cannot properly provide

services to local residents and hence, accordingly,

there is the improper performance of their

empowerments.

The local government bodies financial basis

has always been the subject of many scientists'

researches, among whom the specified institute was

studied by A. A. Campbell (Campbell, 2006), E.

Blazhek (Blažek, 2004), Z. Aeneid (Kovacs, 1994),

М. Ilner (Illner, 1999). Among the domestic

researches there are Boldyrev, O.Y., Chikhladze,

L.T., Avakyan, S.A.

The purpose of the article is to study the local

government in Hungary economic component, since

it is in this country that changes have been taking

place in recent years, in particular, the local

government financial systems, which are of

considerable interest. The purpose of the work is to

analyze the local government functioning economic

https://orcid.org/0000-0001-8628-3985

components in Hungary current state, to investigate

how the country local budget is replenished and how

the corresponding expenses are distributed.

2 METHODS AND MATERIALS

Since 2010-2011, Hungary has embarked on a

difficult path of constitutional reforms, in particular

the new Hungarian Basic Law (Constitution)

adoption on April 25, 2011 (entered into force on

January 1, 2012) and the new Law "On Local

Government" adoption. It is necessary to pay

attention to the economic components sustainable

development of the local government functioning in

this country.

The summary of the main material. The Basic

Law of Hungary (2012) does not contain a

sufficiently regulated, fixed financial basis for local

government. In accordance with the Basic Law of

Hungary, Article 32, local government bodies

determine the local budget for solving local issues

and independently manage the local budget, exercise

the property ownership right, and make decisions on

the local taxes types and amounts.

There are some reservations about the local

government financial basis, as the local authorities

828

Butenko, A.

Sustainable Development of the Functioning of Local Self-government Bodies in Hungary in the Economic Aspect.

DOI: 10.5220/0010598308280832

In Proceedings of the International Scientiﬁc and Practical Conference on Sustainable Development of Regional Infrastructure (ISSDRI 2021), pages 828-832

ISBN: 978-989-758-519-7

financial autonomy in Hungary has significantly

decreased in recent years. Financial subsidies and the

share of some taxes that financed municipalities have

significantly decreased. This is mainly due to the

local governments debts. And thus, the central

government has committed itself to paying debts

back, and the price of this is a significant reduction in

the local authorities financial independence. In

particular, it was noted by the Congress of Local and

Regional Authorities representatives in their 2013

report on local government in Hungary after the

2010-2013 constitutional changes in Hungary.

According to their conclusions, the Hungarian

legislation provisions on the local government

financial basis do not comply with the European

Charter of Local Government, Article 9.

In Hungary, the basis that regulates the local

government financial basis is section VI of the Law

"On Local Government", with the title "Economic

basis of local Government" (Articles 106-118). In

addition, there is a law C "On local taxes", which has

entered in force in 1991, but every year the

Parliament amends it. In general, the current

legislation of Hungary in the local finances field is

primarily aimed at reducing the municipalities debt,

by rationalizing the funds provided to local

government. In the context of the economy affected

by the crisis and the resources reduction, the

government presented a project to reduce the local

authorities competence and, accordingly, the

implementation financial costs, as the only possible

solution.

As noted above, the Basic Law and the law "On

Local Government" also contain provisions on the

financial resources provided by the State through the

delegation of services to the local level. Due to the

fact that the two laws use different wording, each of

them can be used in favor of different arguments.

According to the Basic Law of Hungary, the state

must provide “the necessary funding”, but according

to the law “On Local Government”, the state must

provide the local government with “sufficient”

sources of funding to fulfill the delegated powers.

This term is interpreted in the municipal lobbying

language and defines that "the state must fully finance

the services delegated to the local level".

One of the main signs of the local government

bodies independence is the possibility of forming,

approving and executing local budgets. In this case,

the outstanding position is the local budgets income

source.

The Law "On Local Government" in Hungary,

Article 106, defines that local revenues consist of: 1.

Own income: - local taxes; - income from local

utilities, fines; - income from business; 2. Central

grants: - basic (targeted) subsidies; - special

subsidies; - other subsidies and revenues; 3. General

taxes; 4. Loans, borrowings, deposits.

The most important source of their own income is

local taxes. This issue is regulated by the law "On

Local Taxes", according to which local authorities

have freedom of action in the local taxes disposal and

in setting the tax rate.

This law defines the types of taxes (objects and

tax payers), as well as the maximum level of tax that

a municipality can impose. Local tax orders must

provide for: (i) who pays the tax, (ii) the tax basis, (iii)

all exceptions, (iv) the tax rate, and (V) the conditions

for the tax liabilities occurrence and termination.

According to the current legislation of Hungary,

the main local taxes are the sales tax, the municipal

tax, the property tax and the tourism tax. Partial taxes

are personal income tax and vehicle tax. The main

local tax is the sales tax, which is paid by a company

located in the municipality. This tax is about 16% of

the total municipal income. The sales tax is imposed

on the company's net profit, excluding the expenses

for services and materials (i.e., non-labor expenses).

The local tax in Hungary is a tax that is imposed

according to the number of the population. This is a

typical type of tax on the total amount of income.

Although it is used by 60% of municipalities, its

profitability and economic impact are not significant.

The income from the local tax is only 2% of

municipal budgets, which calls into question its

application reasonability. The property tax rate is set

by the municipality. Property tax in Hungary is

generally imposed depending on the property size and

location. Law C "On Local Taxes" allows

municipalities to impose property taxes based on its

market value. But in reality most municipalities do

not impose value-based taxes. The property tax

optimal administration is carried out at the local level,

where all land plots can be identified, as well as

changes in land plots and ownership changes. All

records stored at the local level. This tax brings the

most stable income to the municipality, and has a

good effect on improving the creditworthiness. The

personal income tax is a centralized tax that is

partially redistributed at the local level. The 8%

personal income tax that remains with the

municipalities is transferred to the central

government. Vehicle tax. 100% of this tax goes to the

local budget, but the central government plans to

refuse the receipt of 60% of this tax.

Central grants represent another source of income

at the local level. The purpose of transfers is to create

a balance between the different districts income and

Sustainable Development of the Functioning of Local Self-government Bodies in Hungary in the Economic Aspect

829

expenditure, because municipal responsibilities must

be met everywhere. The main question is whether it

is possible to develop a transfer system that balances

spending needs and income distribution. Hungary

provides transfers to municipalities for capital

investment as well as for operational purposes, the

latter are known as regulatory grants.

Grants are rare in Hungary, although this type of

transfer would give more autonomy to municipalities,

and it is most fully stated in the Charter, Article 9.

The purpose of the grants is to develop

municipalities, create jobs and reduce regional

development disparities. Unfortunately, these costs

rarely achieve their goals. The subsidies provision in

Hungary has never been predictable, since transfers

can be reduced at the central level without the local

government consent. In addition, the factors

influencing changes in transfers are not stated in the

law. Thus, municipalities are defenseless against

central transfer decisions.

Less than one third of local revenue comes from

general (quarterly) and special subsidies in the form

of financial support from the State budget. Special

subsidies are allocated for specific purposes, that is,

for special public services. Their use is limited, since

they can be spent on what they were provided for. In

addition to general and special subsidies, so-called

targeted subsidies are allocated to local government

to achieve certain goals and objectives that are set

annually by Parliament. These goals are the local

infrastructure development or social investment, the

health care facilities improvement, water supply, road

construction and others. In case of subsidies misuse,

the amount of subsidies together with the interest is

returned to the central budget. Despite the spending

decentralization, revenue remained centralized even

twenty years after the transition to democracy. In

Hungary, 46% of local income comes in the form of

various subsidies from the central government.

Today, the central government of Hungary has put

the local government financing in a strict framework:

 local governments cannot plan a deficit in the

annual budget;

 the delegated performance powers should be

covered only from own

 local government revenue (for example, local

taxes, income from

 local enterprises);

 the conditions for issuing bonds and obtaining

credit have become more stringent.

 in recent years, government transfers have been

reduced to 68%.

The last decade for Hungary has shown a

systematic increase in the local budget expenditures

indicators correlative to the volume of state budget

expenditures.

The local budget in Hungary expenditure part

includes primary education - 11%, health - 13%,

social services - 14%, administrative expenses - 29%,

transport - 5%. However, in the near future, changes

are possible, since some services provision has been

transferred from municipalities to the central

government, and, accordingly, local government

expenditures are reduced, but they are also deprived

of a part of their income.

The change in the local government

macroeconomic burden is illustrated by the two tables

below. Table 1 shows changes in the income

macrostructure, and table 2 shows changes in the

expenses macrostructure. It is worth noting that the

main changes are caused by the adoption of the Law

"On Local Government" (2011). At the macro level,

changes in the local government competence can be

shown by changes in expenditures, as shown in Table

3 RESULTS AND DISCUSSIONS

The municipal property legal regulation and property

rights specifics are determined by the state internal

legislation, i.e. civil, economic legislation. However,

the municipal property primary regime is determined

by administrative and financial legislation.

In Hungary communal ownership emerged after

the introduction of the law “On the transfer of state

property to the local government bodies possession",

1991. The proceeds from the urban enterprises

privatization were distributed between the local

government and the central government.

Municipalities became owners of privatized state

institutions on the principle that the land that is

allocated for these institutions is a municipal

property. Many of these assets were sold because

municipalities recognized that they were difficult to

maintain. Part of the income from the privatization

was spent on other capital investments and partially

on operating costs. Of course, the value of these

buildings and land depended on the county economic

development. So the rich municipalities received

assets that were much more valuable than those of the

less affluent municipalities. The result was the

difference between the municipalities budget

provision.

According to the Basic Law of Hungary, Article

38, the property of the State and local government is

national property, and the law CXCVI "On National

Property" stipulates that the ownership, use and

ISSDRI 2021 - International Scientiﬁc and Practical Conference on Sustainable Development of Regional Infrastructure

830

disposal of property that is the exclusive property of

the local government, in accordance with the

procedure established by law, can be transferred. The

right to manage and use the property, with the

exception of an easement, is not inherited, so divisible

property is not formed. According to Hungarian law,

the local government property consists of its own

property and property rights. The local government

property should be used in the interests of providing

those public services that, in accordance with the law,

should be provided by the local government bodies.

A special part of the local government property is

the stock property, which must be registered

separately from other property. The stock property is

necessary for the local government exclusive powers

performance. The stock property has non-negotiable

parts (highways and engineering structures on them,

squares, parks, archival materials), then it has limited

negotiable parts (municipal equipment); in the latter

case, the government bodies must regulate the

provisions regarding the right of disposal and use in

the relevant act. Since the property that does not

belong to the local government stock property is a

part of the local government business property

(Kechkesh, 2013).

The use of national property in excess of the limit

established by law or by a local government bodies

act is allowed only on the basis of a competition. The

Law "On National Property" notes that in the case of

the local government real estate sale, the state has the

right of preferential purchase. The state and local

governments cannot buy property from an

"nontransparent" seller. In the responsible property

management interests, the law requires the local

government property registration and its permanent

accounting (maintaining the municipal property

4 CONCLUSIONS

It should be noted that, first of all, Hungary has a

certain regulatory framework that regulates local

finance. In particular, the law establishes the local

budgets financial revenues sources, expenditures, the

property stipulated status and so on. Another thing is

that the local government in Hungary economic basis

should be considered in the aspect of the state powers

centralization, i.e. the state has made a certain shift of

competence to its own side. Hence, the local

government funding restriction, in particular, the state

support reduction, which is clearly confirmed by the

above tables. At the same time, the state delegated

powers implementation remains a priority.

It should be noted that local government bodies in

Hungary do not have financial autonomy, as one of

the most important principles of the European

standards of local government. Thus, local authorities

do not have sufficient capacity to address local issues

properly for sustainable development.

It is clear that the central government actions are

due to the local government debt reduction and the

economic crisis consequences elimination. However,

it is worth remembering that limiting the local

government democratic principles will not contribute

to the population contentment, as the main criterion

for the public authorities activities, and in addition, in

the future it will contribute to the region development.

REFERENCES

Avak'yan, S.A. (2008). Konstitutsionnyye osnovy

mestnogo samoupravleniya v Rossiyskoy Federatsii:

itogi 15-letnego razvitiya, sovremennoye sostoyaniye,

Konstitutsionnyy vestnik, 1 (19).

Blažek, J. (2004). Local financing and settlement structure.

Territory, Society and Administration. The Czech

Republic and the Industrial Region of Liberec.

University of Amsterdam, Charles University, Czech

Academy of Sciences, p. 85-94.

Campbell, A. (2006). Into the Mainstream: Local

Democracy in Central and Eastern Europe, Local

Government Studies. 32(5):543–561.

Illner, М. (1999). Teritorial Decentralization: An Obstacle

to Democratic Reform in Central and Eastern Europe?

The Transfers of Power: Decentralization in Central

and Eastern Europe, ed. Ьу J. Kimball. The Local

Government and Public Service Reform Initiative, Р.

31.

Kechkesh Laslo. Grazhdanskoye pravo. Pravo lichnostey

(str. 127-134) Elektronnyy resurs. Rezhim dostupu:

http://ptk2013.hu/polgari-jogikodifikacio/dr-kecskes-

laszlo-europa-jogi-tapasztalatok-az-

allamjogszabalyalkotassal-okozott-karokert-valo-

felelossegenek-megalapozasahoz-pjk20034-3-19-

o/488

Kostyukov, A.N. (2018). Narodovlastiye i mestnoye

samoupravleniye: konstitutsionnyye problemy

realizatsii, Vestnik Sibirskogo yuridicheskogo instituta

MVD Rossii, № 4 (33). S. 30–37.

Kovacs, E. G. (1994). The Government and the Local

Authorities. In Balance: Тhе Hungarian Goverпment

1990-1994. P. 142

National Reform Programme of Hungary Based on the

Szell Kalman Plan, April 2011 Elektronnyy resurs.

Rezhim dostupa:

http://ec.europa.eu/europe2020/pdf/nrp/nrp_hungary_e

n.pdf

Osnovnoy Zakon Vengrii ot 25 aprelya 2011 r. Elektronnyy

resurs. Rezhim dostupa:

Sustainable Development of the Functioning of Local Self-government Bodies in Hungary in the Economic Aspect

831

http://presidentialactivism.wordpress.com/2011/03/28/

full-english-text-of-the-newhungarian-constitution/

The Congress of Local and Regional Authorities 5th

SESSION, Strasbourg, 29-31 October 2013. Local and

regional democracy in Hungary. Elektronnyy resurs.

Rezhim dostupa::

https://wcd.coe.int/ViewDoc.jsp?id=2122295&Site=C

Yevropeyskaya Khartiya mestnogo samoupravleniya.

Prinyata Parlamentskoy Assambleyey Soveta Yevropy

15 oktyabrya 1985 goda v Strasburge. Ratifitsirovana

Federal'nym zakonom ot 11.04.1998 № 55-FZ //

pravo.gov.ru.

Zakon Vengrii “O mestnom samoupravlenii” ot

28.12.2011. Elektronnyy resurs. Rezhim dostupa:

http://www.kormany.hu/download/b/1e/60000/%C3%

B6tv.pdf

Zakon Vengrii “O mestnykh nalogakh” Elektronnyy resurs.

Rezhim dostupa:

http://net.jogtar.hu/jr/gen/hjegy_doc.cgi?docid=99000

100.TV

Zakon Vengrii CXCVI “O natsional'nom imushchestve”

Elektronnyy resurs. Rezhim dostupa:

http://net.jogtar.hu/jr/gen/hjegy_doc.cgi?docid=A1100

196.TV

Zakon Vengrii XVI “O peredache gosudarstvennoy

sobstvennosti v sobstvennost' organov mestnogo

samoupravleniya» Elektronnyy resurs. Rezhim

dostupu:

http://net.jogtar.hu/jr/gen/hjegy_doc.cgi?docid=99100

016.TV

ISSDRI 2021 - International Scientiﬁc and Practical Conference on Sustainable Development of Regional Infrastructure

832