The staff of the Magyar Nemzeti Bank have conducted an analysis of the Draft Budget for 2012. The analysis finds that next year the general government deficit could be 3.1% of Hungary’s GDP. This implies that the Government’s deficit target can be met by cancelling the major part of appropriations for central government reserves and fully implementing the measures envisaged in the Draft Budget. At the same time, cancelling reserves is likely to limit the Government’s ability for fiscal manoeuvre, which in turn will have no tool to use to offset any adverse effects potentially arising during next year.
The staff of the Magyar Nemzeti Bank have conducted an analysis of next year’s Draft Budget. The government deficit on an ESA basis is projected by the Bank to be 3.1% of Hungary’s GDP. This is 0.6 percentage points higher than the figure set out in the Draft Budget.
This difference is mainly accounted for by the fact that the estimated balance-enhancing impact of several of the Government’s measures on the deficit is likely to fall short of what presented in the Draft Budget. The remaining part of the difference can be attributed to the different forecast for the future macroeconomic development and the fact that some of the measures are not detailed enough to allow a proper quantification of their effects on the budget balance.
The Bank’s projection for economic growth is weaker than the macroeconomic path set out in the Draft, in part reflecting the Government’s fiscal measures. However, the different outlook for growth is likely to have a marginal impact on the 2012 government deficit. Although slower growth in consumption and investment, associated with weaker corporate profits, will adversely affect tax revenues, this will be offset in large part by staff’s projections for higher inflation, faster wage growth and, consequently, higher socal security contribution revenues, as a result of the increase in the minimum wage next year.
The Bank judges the 2012 deficit position of local authorities to be more favourable than presented in the Draft: the deficit of the local government sub-sector in 2012 is likely to be 0.2% lower as a percentage of GDP than presented in the Draft.
The Draft Budget contains a higher amount of reserves compared with last year. The Bank expects that the Government will use the major part of reserves (some HUF 250 billion) to reduce pressures caused by expenditure limits and cover the costs of compensating for the negative effect of changes in PIT, already announced. Cancelling the remaining HUF 200 billion of reserves could be sufficient to improve the projected ESA 95 deficit from 3.1% to the 2.5% target set by the Government. In other words, the deficit target could be met by cancelling the major part of reserves. In that case, however, the Government would have no reserves to draw on to offset any adverse effects potentially arising during next year.
There are both numerical and formal inconsistencies in the Draft Budget with the Act on Fiscal Responsibility. First, the balance of discretionary items in 2012 is higher than targeted a year ago. Second, the Draft does not include the targets for the balance of discretionary items for 2013 and the primary budget balance for 2014. However, the Draft Budget meets the debt rule incorporated in Hungary’s Fundamental Law to come into force in 2012.
The Bank will publish the full text of the analysis on 20 October.
MAGYAR NEMZETI BANK
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