2011 deficit target is attainable

The Magyar Nemzeti Bank publication ‘Analysis of the general government’ — issued for the first time today — concludes that the government’s deficit target envisaged for 2011 is attainable, although the developments in the deficit are surrounded by macroeconomic and fiscal risks. The analysis suggests that the cash-based balance of the central government may be somewhat more favourable than expected, although tax revenues may fall short of the plan, this may be offset by the lower-than-expected deficit of the social security funds. Excluding most of the one-off items related to the takeover of the private pension fund portfolio, the 2011 accrual-based budget deficit is expected around 2.8 per cent of the GDP.

The Governor of the Magyar Nemzeti Bank is a member of the Fiscal Council (FC), and thus the central bank is one of the professional workshops supporting the work of the FC. Therefore, the MNB launches a new series of publications entitled ‘Analysis of the general government’. The first issue of the series is the analysis entitled ‘Economic developments affecting the room of manoeuvre available for the 2012 budget’ published today.

The aim of the study is to provide information, during the planning phase of the 2012 budget, concerning this year’s fiscal developments and the expected changes of the budget items determined by macroeconomic and demographic processes (mandatory items). This information may be incorporated into and form the basis of the opinion which the FC will later issue regarding the 2012 budget bill.

The analysis concludes: on an ESA basis, the central government will have a surplus in 2011 resulting from the transfer of private pension fund assets, while the cash deficit of the general government may reach 6.4 per cent of GDP. Excluding the one-off items excluded from the budget adopted in December, 2010 the government aimed at attaining a 2.9 per cent ESA deficit. According to the new MNB publication, this target can be attained, and the ESA deficit net of one-off items may reach 2.8 per cent in 2011.

Total tax and contribution revenues may achieve their target levels, although with a different structure. The June 2011 amendment to the Budget Act reduced tax revenues by HUF 176 billion, bringing it to a level more realistic than the original overly optimistic earlier target figures. According to the MNB, tax revenues may nevertheless fall short of the revised target, although the shortfall may be offset by smaller deficits of the social security funds.

Under a less optimistic scenario, the risks related to the underlying fiscal developments and the implementation of certain measures may worsen the 2011 general government balance by 0.5–0.6 per cent of GDP in total. The most important risk is related to the cancellation of the stability reserve. Although the cancellation was incorporated into the MNB projections, without permanent expenditure reducing measures the cancellation may result in additional fiscal strain in the second half of the year. In addition, macroeconomic developments that in variance with MNB expectations — i.e. more restrained household consumption — may considerably alter the outcome of the 2011 fiscal year.

In 2012, the balance of the budget items determined by demographic and macroeconomic variables is expected to worsen slightly, in GDP proportional terms. Considering that the one-off revenues from the private pension fund assets will not be available in 2012, achieving the government’s deficit target of 2.5 per cent will require an improvement in the discretionary items’ balance of more than 2 per cent of GDP.

MAGYAR NEMZETI BANK

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The primary objective of the MNB shall be to achieve and maintain price stability. (...) Without prejudice to its primary objective, the MNB shall support the maintenance of the stability of the system of financial intermediation, the enhancement of its resilience, its sustainable contribution to economic growth; furthermore, the MNB shall support the government’s economic policy and its policy related to environmental sustainability, using instruments at its disposal.