The politics of fiscal consolidation and reform under external constraints in the European periphery: comparative study of Hungary and Latvia

ABSTRACT

This article investigates the diverse experiences of fiscal consolidation under external constraints in Hungary and Latvia. The financial crisis that hit in the early years of the twenty-first century had a profound effect on the economies of many EU member states. The responses, however, were diverse. Some countries, such as Latvia, implemented deep consolidation within a relatively short amount of time, while retaining political stability. Other countries, such as Hungary, went through an extensive period of fiscal consolidation, and experienced a significant shift in domestic politics. This paper looks at the factors explaining the variety of responses to the crisis.

KEYWORDS:

• Crisis
• fiscal consolidation
• administrative reform
• comparative analysis
• external constraints

Acknowledgments

We would like to thank the editor of this special issue Prof. Walter Kickert, participants of the workshop organised for this special issue, and in particular Prof. Tiina Randma-Liiv and Prof. Edoardo Ongaro, as well as the three anonymous reviewers for their helpful suggestions and comments. All mistakes and omissions remain our own.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. Although the Godmanis government resigned in early 2009, it resigned not due to mass protests, but largely due to the internal disagreement on the implementation of the austerity measures agreed upon with the international institutions. In 2011, as a result of a referendum, the parliament was dismissed, however, it was largely the result of political manoeuvring by the President Zatlers, exploiting the general dissatisfaction with political institutions to his own political advantage (his newly formed party came in second in the extraordinary elections in autumn 2011).

2. Latvia: Interviews were conducted between 2013 and 2016 with representatives of the Bank of Latvia, Ministry of Finance, Finance and Capital Markets Commission, State Employment Agency, State Social Insurance Agency. Some of these were conducted as part of the project, Understanding policy change: Financial and fiscal bureaucracy in the Baltic Sea Region, supported by the Norwegian–Estonian Research Cooperation Programme. Hungary: Interviews were conducted between 2015 and 2017 with representatives of National Bank of Hungary, the Fiscal Council, the IMF Resident Representative Office, Ministry of Finance, Ministry of National Economy, European Commission.

3. Hungary’s public sector arrangements were influenced from Moscow, though this influence lost gradually its strength especially after the 1956 Revolution.

4. Eurozone entry target dates were delayed several times, while the country drifted further away meeting the Maastricht criteria.

5. The term is applied for Hungary’s softer policy stance adopted after the 1956 revolution to stabilize Communists in power, i.e. a deviation away from soviet-type communism providing higher living standards and more personal freedom to citizens compared to peer countries.

6. Sector taxes and various new taxes (i.e. on the financial transaction); flat personal income tax; social transfers changed to extensive public works schemes; full abolishment of the three-pillars pension system (i.e. obligatory pension funds axed) etc.

Additional information

Funding

This work was supported by the EEA Grants [EMP264].

Notes on contributors

Aleksandrs Cepilovs

Aleksandrs Cepilovs is a project manager at the Ragnar Nurkse Department of Innovation and Governance, Tallinn University of Technology, Estonia. He received his PhD in Technology Governance from Ragnar Nurkse Department of Innovation and Governance, Tallinn University of Technology. His research interests include innovation policy and innovation in public administration, as well as policy transfer, in particular focusing on the region of Central and Eastern Europe.

Zoltán Török

Zoltán Török is a PhD candidate at the Department of Public Policy and Management, Corvinus University of Budapest, Hungary. He is the Head of Research of Raiffeisen Bank Hungary. His research interest is international finance, public policy change, focusing on tax policy.