ANALYT VIEW - Hungary’s Orbán tests IMF, EU by vision of deficit target breach

“There seems to be a 0.2% of GDP risk to the budget deficit in 2009, in excess of opportunities through tapping the reserves built in the budget," János Samu, analyst at Concorde said on Thursday.

“We have the feeling that the government is trying to keep a tight control over public finances through imposing very strict constraints over central institutions. This means that the expenditure of ministries is pretty limited: this is supported by anecdotal evidence, which says that ministries often ask for payment delays in the case of purchased goods and services to postpone expenditure to 2010. This means that the so-called left-over appropriations of ministries would increase significantly and harming next years' budgets (or the ease of their operations)," he added.

In his view, the bad shape of public finances stems primarily from the falling tax base and the even larger fall in actual revenues (the gap could account for the 'greying' of the economy).

Inflow of VAT revenues, one of the most important part of tax revenues, has been anaemic through the year, with the latest months not being exemption either, Samu added.

He believes the government is likely to be able to reach its 3.9% of GDP general government budget deficit, “at a price to postpone some of the pain to next years' budgets."

Samu said, however, that the fate of the 2010 budget is still unclear, seeing “significant risks to the outcome, while the political will to contain these pressures is pretty much missing."Viktor Orbán, President of the main centre-right opposition party Fidesz, has recently said the deficit in 2010 will not stop below 7.3-7.5% of GDP.“Being the most likely winner of the next elections due in spring next year, we think Fidesz is trying to prepare the ground for a larger deficit and at the same time testing the European Commission’s as well as the IMF’s likely response to a widening deficit," Samu said.

Orbán’s comment makes it likely that next year’s budget “will be hit by the risk factors we have already highlighted, leading to a weaker forint and somewhat higher yield curve, consistent with our forecast."

Samu believes the eventual 2010 gap could stop in the range of 5-6% of GDP, given the size of all the risks, even if the next government decides by a loosening of the budget relative to the targets.

“Deterioration in the fiscal performance would not be an extraordinary phenomenon in today's world, it would, however, contrast with the very optimistic view of several market participants and pose some danger in times of international market volatility and reduced domestic interest rate spread."

• Tags:
• economy