The Budapest Modell
The most important result of the Budapest financing management reform in 1995 was the emergence of a financial planning method that could support strategic management. As part of the planning process, a seven-year financial model was introduced that arranged the various elements of the budget into a transparent system. This financial model is a tool for planning: it enables the city to simulate the effects of any policies. This way, in principle, the debates on the financial strategy and the budget conception can be kept within the limits of rationality.
The total transparency, which is the main principle of this methodology of course, is a key element of municipal creditworthiness as well.
Since the introduction of the new financial strategy and the new planning method, the key indicators of the Budapest budget have improved significantly.
As you see during this years the real value of the transfers from the central budget has markedly decreased. The marked increase in the city’s own revenues – after the approval of the 1995 reform strategy – not only compensated for the diminishing resources but also prompted an increase in the real value of the municipality’s total revenues. In this respect the strategy was successful.
However, the third elction cycle – when between 1998-2002 Viktor Orban was first time the prime minister for four year – brought this positive trend to a halt. In that period – and especially between 2000 and 2002 – the drastic drop in the real value of the central transfers was accompanied by measures by the central government that significantly decreased the municipality’s chances to generate its own resources.
Chart 9 shows that the drop in the central transfers and the increase of the municipality’s own revenues were so marked that their ratio became reversed in the budget.
The next chart about expenditures shows that the gradual reduction of the real value of the operating costs enabled the city to maintain its level of investments (Chart 10).
EXPENDITURES AT 1991 REAL VALUE (billion HUF)
The last, the Chart 11 shows the changes in the operating surplus, which is in the focus of the financial management strategy. The chart reveals that as a result of the gradual implementation of the financial management strategy that was approved in 1996 together with the annual budget conception for that year, the operating surplus increased between 1997 and 1999. However, the cuts in resources that occurred during the third election cycle reversed this trend.
THE INSTITUTION RATIONALIZATION FUND
To promote the reduction of the operating costs, the financial reform ventured to introduce a more efficient – and cheaper – institutional structure and operation.
In general, this type of rationalization – what was politically difficult but absolutely necessary – had two kinds of obstacles. First is the lack of resources. Rationalization may require significant one-time investments, since the transformation of the institutional structure often involves reorganizations or extra investments. The improvement of the operation’s efficiency often requires modernization investments. In addition, the affected institutions often cannot afford to foot the bill for required one-time major investments or the reorganization process. Thus, they are unable to lay the foundations for their subsequent cheaper operation.
The asymmetric possession of information is the other obstacle. Through rationalization, the municipal leaders attempt to save operating costs, but have no accurate information on the savings potentials of the various interventions. This – more or less accurate – information normally rests with the leaders of the institutions. However, they are not interested in assisting in the reduction of operating subsidies. Instead, they are inclined to use their professional expertise for securing yet more funds for the development of their institutions’ range of activities.
Clearly, there is a need for cooperation between the municipal and the institution’s leaders.
The municipal leaders should allocate resources for the rationalization process, and the institution leaders should explore the possibilities of cutting costs. The one-time resource injections can be justified by the permanent drops in operating costs.
The prime minister Orban Viktor from the very beginning considered the city of Budapest as a “sin city”. He deprived the city from the basic resources and he was openly speaking about that he wants to “dry out” Budpest. He stopped all the major investments in the city. But finally lost the 2002 election because of this policy: out of 32 parlimentary seats the opposition –the socialist and the liberals – won 28 seats. This major victory compensated the losses in the countryside.