Economy
What does Fidesz want? Hungary's budget deficit on the centre stage
Let’s start by looking at the “base case" scenario for next year’s budget gap. In this case it will be 3.8% of gross domestic product, at least this is what the Socialist cabinet set as its target. However, not everyone agrees that this is achievable, saying an overshoot by a few tenths of a percentage point is very much on the cards. Moreover, governments have a tendency to loosen the purse strings in election years. Considering these obstacles, the deficit figure may in fact start with the digit 4. But how on earth could the deficit be bloated to 7.0%?
“Clean slate" scenario
According to one version, Fidesz would not let the deficit run away, only it would adjust the budget with previously unaccounted spending items so that it can “start with a clean slate". This scenario has become miraculously popular in the party’s top ranks after projections for a 7.3-7.5% deficit raised brows at both the IMF and the European Commission.
Let’s see what these items would be, shall we? György Matolcsy, a former economy minister and a top economic strategist of the main centre-right opposition party, put together a crafty little list that comprises the central bank’s (NBH) losses, the consolidation need of the Hungarian Development Bank (MFB), the rescheduling of spending items from 2009 to 2010, the funding pledged to hospitals, the consolidation need of the Budapest Transport Company (BKV) and state-run railway company MÁV, funding for bureaucracy and some state guarantees.
The bill comes to around HUF 1,100 billion, largely 4% of GDP.The problem with this list is that the estimates behind certain items seem exaggerated, while other items simply mean extra handouts relative to previously agreed objectives. And it is downright mysterious that while Fidesz claims it does not know the true state of the budget and expects to find skeletons in the government’s closet, it is stunningly well-informed about how large state guarantees will need to be drawn next year.
Through a glass darkly
The main reason behind the massive uncertainties about the 2010 deficit is that no perfect solution exists for the way state management should be settled in the budget. For instance, the ESA accounting system applied in reports to the European Union is not seamless either, although it is way more credible than the old Hungarian methodology, because of the shenanigans the latter made possible in previous years.
One of the consequences of this imperfection is that the reported general government balance ceases to be purely an issue of economics and economic policy and becomes a matter of political economy, as well. For instance, there are about 90 companies whose results influence the budget balance although in ESA-95 there are officially only 30 such companies. The deficit figure can swing several percentage points in either direction depending on such nuances as whether rail transport losses are accounted at MÁV Zrt. or MÁV Start or whether the profits of the Hungarian Electricity Works (MVM) are paid out as dividend or not. And there are many more examples of this nature.
Some of the implications generated by the aforementioned are widely known. The governments tend to leave out loss-making companies from budget accounting until the end of their term, but then a new cabinet takes over and all at once it consolidates via debt assumption the liabilities of let’s say MÁV that were inlfated to HUF 220 bn over several years. And then with some “change" added you already have a budget gap of 5-6% of GDP in your lap - at least.
It seldom gets public attention that the consolidation of losses can in fact be done to the extremes. A company, for instance, can be overcapitalised to such extent that it is defended not only against previously accumulated losses but also that it gets protection against future failures. And at this point we may say with a fair amount of certainty that the government next year will be able to show as large a deficit as it wants - with certain relatively loose limitations of course. And then wise men with long beards can start scratching their heads looking for the exact reasons of the target overshoot.
Why scaring with a high deficit then?
There is more than one answer to this question. Some of it you may have already read on Portfolio.hu’s pages. Let’s see only the most likely ones in bulletpoints.
- Fidesz has no intention to implement measures, e.g. the ever so popular tax reductions, that would lead to a high budget deficit, but it wants to “legitimise" itself for not stepping on this path by forcing international bodies (IMF, EU) to sound the alarm in this respect.- Fidesz is preparing a “clean slate" scenario and wants to ready the market for a deficit of around 6.0%.
- The promised tax cuts (or a possible spending increase) cannot be carried out while fulfilling the deficit goal therefore the target needs to be raised and a new budget needs to be created.- Although Fidesz will not reduce taxes next year, when it eventually does in 2011 it will have a deficit bloated by special items behind it so it will be able to gloat about how cleverly it lowers the gap that year. While this would not result in a debt course that would be in accordance with fiscal responsibility regulations, that law requires only 50% of votes in Parliament to pass...The saddest thing is that the information we have about some parties’ economic programme is not enough even to scratch out at least a few of the scenarios that often sharply contradict each other. In contrast, in the Netherlands election programmes come equipped with impact studies and it is downright embarrassing when the budget council fails to put a price tag on the campaign for the insufficient information the given party has provided.
If you want to lose any cheer that may be left in you, just take a look at where Hungary has gotten since 1998. In that particular election campaign the opponents engaged in heated debate whether the 4-5% economic growth under favourable balance conditions could be realistically boosted to 7% or is it just a pipedream. Well, the 7% figure is still here, although it refers to the possible size of the gap, while the economy remains in recession.
“Clean slate" scenario
According to one version, Fidesz would not let the deficit run away, only it would adjust the budget with previously unaccounted spending items so that it can “start with a clean slate". This scenario has become miraculously popular in the party’s top ranks after projections for a 7.3-7.5% deficit raised brows at both the IMF and the European Commission.
Let’s see what these items would be, shall we? György Matolcsy, a former economy minister and a top economic strategist of the main centre-right opposition party, put together a crafty little list that comprises the central bank’s (NBH) losses, the consolidation need of the Hungarian Development Bank (MFB), the rescheduling of spending items from 2009 to 2010, the funding pledged to hospitals, the consolidation need of the Budapest Transport Company (BKV) and state-run railway company MÁV, funding for bureaucracy and some state guarantees.
The bill comes to around HUF 1,100 billion, largely 4% of GDP.The problem with this list is that the estimates behind certain items seem exaggerated, while other items simply mean extra handouts relative to previously agreed objectives. And it is downright mysterious that while Fidesz claims it does not know the true state of the budget and expects to find skeletons in the government’s closet, it is stunningly well-informed about how large state guarantees will need to be drawn next year.
Through a glass darkly
The main reason behind the massive uncertainties about the 2010 deficit is that no perfect solution exists for the way state management should be settled in the budget. For instance, the ESA accounting system applied in reports to the European Union is not seamless either, although it is way more credible than the old Hungarian methodology, because of the shenanigans the latter made possible in previous years.
One of the consequences of this imperfection is that the reported general government balance ceases to be purely an issue of economics and economic policy and becomes a matter of political economy, as well. For instance, there are about 90 companies whose results influence the budget balance although in ESA-95 there are officially only 30 such companies. The deficit figure can swing several percentage points in either direction depending on such nuances as whether rail transport losses are accounted at MÁV Zrt. or MÁV Start or whether the profits of the Hungarian Electricity Works (MVM) are paid out as dividend or not. And there are many more examples of this nature.
Some of the implications generated by the aforementioned are widely known. The governments tend to leave out loss-making companies from budget accounting until the end of their term, but then a new cabinet takes over and all at once it consolidates via debt assumption the liabilities of let’s say MÁV that were inlfated to HUF 220 bn over several years. And then with some “change" added you already have a budget gap of 5-6% of GDP in your lap - at least.
It seldom gets public attention that the consolidation of losses can in fact be done to the extremes. A company, for instance, can be overcapitalised to such extent that it is defended not only against previously accumulated losses but also that it gets protection against future failures. And at this point we may say with a fair amount of certainty that the government next year will be able to show as large a deficit as it wants - with certain relatively loose limitations of course. And then wise men with long beards can start scratching their heads looking for the exact reasons of the target overshoot.
Why scaring with a high deficit then?
There is more than one answer to this question. Some of it you may have already read on Portfolio.hu’s pages. Let’s see only the most likely ones in bulletpoints.
- Fidesz has no intention to implement measures, e.g. the ever so popular tax reductions, that would lead to a high budget deficit, but it wants to “legitimise" itself for not stepping on this path by forcing international bodies (IMF, EU) to sound the alarm in this respect.- Fidesz is preparing a “clean slate" scenario and wants to ready the market for a deficit of around 6.0%.
- The promised tax cuts (or a possible spending increase) cannot be carried out while fulfilling the deficit goal therefore the target needs to be raised and a new budget needs to be created.- Although Fidesz will not reduce taxes next year, when it eventually does in 2011 it will have a deficit bloated by special items behind it so it will be able to gloat about how cleverly it lowers the gap that year. While this would not result in a debt course that would be in accordance with fiscal responsibility regulations, that law requires only 50% of votes in Parliament to pass...The saddest thing is that the information we have about some parties’ economic programme is not enough even to scratch out at least a few of the scenarios that often sharply contradict each other. In contrast, in the Netherlands election programmes come equipped with impact studies and it is downright embarrassing when the budget council fails to put a price tag on the campaign for the insufficient information the given party has provided.
If you want to lose any cheer that may be left in you, just take a look at where Hungary has gotten since 1998. In that particular election campaign the opponents engaged in heated debate whether the 4-5% economic growth under favourable balance conditions could be realistically boosted to 7% or is it just a pipedream. Well, the 7% figure is still here, although it refers to the possible size of the gap, while the economy remains in recession.
