Beneficiaries and cost bearers: evidence on political clientelism from Hungary

ABSTRACT

Previous research has found that there is no uniform budget constraint for local governments: politically favoured local governments receive additional funds and are subject to less fiscal discipline. If so, the fair distribution between beneficiaries and cost bearers of the local fiscal policy is not realised. The paper focuses on this phenomenon in the light of political clientelism. We conduct an analysis regarding the Hungarian local government system between 2006 and 2018 to capture the political patterns in local fiscal policy and central granting policy. Local governments in opposition were underfinanced in terms of discretionary and EU funds, and since 2012 they have also had limited access to credit markets to obtain additional funds. Favoured municipalities enjoy more funds and can deliver more projects to their citizens – at the expense of unfavoured ones. The latter struggle to establish a fair distribution of the burdens between beneficiary generations.

KEYWORDS:

• Soft budget constraint
• local government
• political affiliation
• grants
• bailout
• Hungary

Acknowledgments

The author would like to thank János Kornai and Zoltán Schepp for their valuable help and guidance.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. ‘The behaviour of every organisation concerned is affected by the expectation that it will be bailed out if it gets into serious financial trouble’. (Kornai 2014, 27).

2. As of 2011, revaluations have not been shown separately, because the relevant data of the Central Bank of Hungary are inconsistent.

3. There has been much debate in the literature about the reasons and rationale of debt assumption. See, e.g., Kornai (2014), Lentner (2014), Jankovics (2016), Molnár and Hegedűs (2018) and Vasvári (2018b).

4. For investigating political clientelism, we omit the election year from each period, considering only 3 years, in order to filter out its effect on grant allocation (Turyna et al. 2016).

5. In the case of bond issues, we apply a different approach: due to the high value per capita among small villages, we express the population separately among the control variables.

6. By the end of the first quarter of 2014, the government assumed the total debt amount of local governments. However, this was not known until the end of 2013.

7. By reference to the thoughts of Adam Smith (1776/2001).

Additional information

Funding

This work was supported by the ÚNKP-19-3 New National Excellence Programme of the Ministry for Innovation and Technology [ÚNKP-19-3-III-PTE-229].

Notes on contributors

Tamás Vasvári

Tamás Vasvári is an assistant research fellow in the Faculty of Business and Economics at the University of Pécs, Hungary. He has been researching the local government systems, particularly the Hungarian case for more than ten years. His research focuses on soft budget constraint in the public sector, particularly the impact of political affiliation on central and local decisions.