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.
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
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
components in Hungary current state, to investigate
how the country local budget is replenished and how
the corresponding expenses are distributed.
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
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
2021 by SCITEPRESS Science and Technology Publications, Lda. All rights reserved
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
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
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
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
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
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
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
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
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.
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.
Kechkesh Laslo. Grazhdanskoye pravo. Pravo lichnostey
(str. 127-134) Elektronnyy resurs. Rezhim dostupu:
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:
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
The Congress of Local and Regional Authorities 5th
SESSION, Strasbourg, 29-31 October 2013. Local and
regional democracy in Hungary. Elektronnyy resurs.
Rezhim dostupa::
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 //
Zakon Vengrii “O mestnom samoupravlenii” ot
28.12.2011. Elektronnyy resurs. Rezhim dostupa:
Zakon Vengrii “O mestnykh nalogakh” Elektronnyy resurs.
Rezhim dostupa:
Zakon Vengrii CXCVI “O natsional'nom imushchestve”
Elektronnyy resurs. Rezhim dostupa:
Zakon Vengrii XVI “O peredache gosudarstvennoy
sobstvennosti v sobstvennost' organov mestnogo
samoupravleniya» Elektronnyy resurs. Rezhim
ISSDRI 2021 - International Scientific and Practical Conference on Sustainable Development of Regional Infrastructure