Low but above-target deficit — with risks on the upside

In the projection prepared by Bank staff, the government deficit falls to 2.4 per cent of GDP in 2013 on the assumption that free reserves are cancelled. Therefore, the deficit may remain within the Maastricht reference value for the third successive year, assuming a successful fiscal performance in 2012. The measures announced by the Government following the submission of the budget bill to Parliament, including the programme envisaging a HUF 300 billion reduction in taxes and contributions, have not been taken into account in the projection. However, the 2013 budget does not seem to contain reserves which would provide a cover for extra expenditure.

In the analysis published by the Bank today, the ESA-based government deficit is projected to be 2.8 per cent of GDP in 2013, based on the budget bill submitted to Parliament on 15 June 2012. The deficit may fall to 2.4 per cent of GDP if free reserves in the budget are cancelled in full. Consequently, further measures to reduce the deficit will be required in order to meet the 2.2 per cent target set in the budget bill. The budget bill is consistent with the debt rule laid down in the Constitution — in 2013 the general government debt is likely to decline based on both the budget appropriations and the Bank’s projection.

The analysis concludes that the higher expected level of deficit relative to that contained in the budget bill reflects in large part different macroeconomic paths and the different treatment of 2012 budgetary processes, and in part different assumptions for the effects of the Government’s measures (see the Table at the end of this press release).

Government revenue is likely to be lower than in the budget bill by some 0.6 percentage points of GDP, as a result of the different macroeconomic projections and different treatment of 2012 budgetary processes. Government expenditure is likely to be slightly higher than in the bill, maintaining that significant tensions may develop in some sectors, for example in health care. In terms of the projection of interest expenditure, there is a significant difference between the bill and the Bank’s projection, because the latter takes into account that the risk premium on Hungarian financial assets may fall with the conclusion of the agreement between the Government and the EU and IMF.

The soundness of the budget bill is reduced by the fact that part of the measures have not been put into legislation, while other measures may involve implementation risks. A new type of tax, to be levied on financial transactions, poses another risk. Although the analysis is based on the planned HUF 283 billion revenue as a technical assumption, the net deficit-reducing effect may be lower than planned if the proposed amendment on the financial transaction tax, submitted meanwhile to Parliament, is passed in its current form. In addition, failure to agree with the EU and IMF will also represent a risk to the projection of deficit on the upside.

It is likely that the free reserves of the budget, in particular the Country Protection Fund, will have to be cancelled in order to offset revenue shortfalls caused by the weaker macroeconomic path relative to that envisaged in the budget bill. Consequently, the analysis concludes that the budget bill does not contain any real reserves. 

NOTES TO EDITORS:

The analysis does not take into account the effects of measures announced after the submission of the budget bill to Parliament. Consequently, the package of measures amounting to HUF 300 billion, announced on 28 June 2012, aimed at stimulating growth and job creation as well as reducing the level of taxes and contributions on labour, has not been taken into account in the projection.

The projection is based on the planed revenue of HUF 283 billion from financial transaction tax as a technical assumption, as the final text of the law was not available at the time of preparing the projection.

The effects on the government budget of the measures can only be estimated after the detailed plans become available, by taking into account their macroeconomic impact. However, based on the plans published so far, the measures may raise the 2013 deficit.

Part of the tax laws and other acts underlying the budget bill were not known or available at the time the analysis was finalised. Consequently, in its current form the MNB’s projection for the government deficit, in addition to the balance included in the budget bill, cannot be considered fully established by law.

Table Difference between the Bank’s projection and the 2013 budget appropriations (as a percentage of GDP)

MAGYAR NEMZETI BANK
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