Economy
Hungary's central government debt ratio may decline after 2009 - ÁKK
The key factor in the development of the debt ratio is persistent fiscal discipline. Primary budget balances of 2-3% of GDP in the following years seem to be sufficient for a descending debt ratio. In addition, fiscal discipline may have favourable indirect effects on the development of government debt through declining real interest rates and an appreciating foreign exchange rate. It might as well promote additional economic growth.
Introduction, The model.
Introduction There have been several articles published recently in the Hungarian online media forecasting explosive trends for the Hungarian government debt ratio. Some market analysts stated that the path of the Hungarian government debt had become unsustainable and therefore a drastic shock therapy was needed in fiscal policy. (See István Madár (Portfolio.hu, 20.02.2009.), Péter Duronelly (Index.hu, 10.03.2009.), István Hamecz (Portfolio.hu, 10.03.2009.). Exceptions are e.g. János Samu (Index.hu, 18.03.2009.), Roland Baksa (Index.hu, 22.03.2009.))
Regarding Hungary's economic advancement, the relatively high government debt to GDP ratio is unfavourable due to the interest payments and does not promote the country's Eurozone membership, either. However, the Hungarian Government Debt Management Agency (ÁKK) considers it to be important to clarify the current misunderstandings about government debt trends.
In the following, Mosolygó and Deli of the Government Debt Management Agency (ÁKK) apply first a simple model to analyze the impact of the international credit line on debt ratio trends as well as to demonstrate the importance of calibrating reasonable values for decisive macroeconomic parameters. Later the analysts will introduce a somewhat more sophisticated model to make projections for the Hungarian government debt ratio until 2020.
The Model
The path of the government debt ratio can easily be studied considering a simple economic model with variables including real interest rate, primary budget balance ratio and economic growth. Let b1 denote the debt ratio at the end of the year, b0 the debt ratio at the end of the previous year, r1 the average real interest rate that applies to the real interest payments during the year in accordance with the real debt outstanding at the beginning of the year. In addition, let g1 denote the real growth rate and f1 the primary budget balance as percentage of GDP. It is then easy to see that the following equation holds:
One should also note that the macro parameters in the model fully determine the path of the government debt ratio. Applying the above equation it is easy to understand that if one calculates with persistent high real interest rates and low economic growth, the debt to GDP ratio will necessarily explode unless a favourable primary balance ratio counterbalances the effects of the other two parameters.
The task of economic policy is, however, to prevent such a debt spiral. Macro modelling indicates that the room for fiscal policy to stop undesirable processes is rather large. (One percentage point cut of expenses and therefore 1 percentage point improvement in the primary budget balance in ten years time may lead to an approximately 10 percentage point improvement in the debt ratio.)
After studying the effects of the credit line the analysts therefore take a closer look at the calibration of the macro parameters.
