Rough road lies ahead of Hungary if it wants to meet deficit targets - c.bank

2009 baseline projection

The central bank’s baseline projection does not include any stability reserve for 2009 as a government decision has already been adopted on its final termination, therefore, “the government no longer has any substantial manoeuvring room to compensate for extra spending on the expenditure side." Consequently, the NBH staff expects a slight overshooting of the deficit target in 2009 (4.0% vs. 3.9% goal).

2010 estimates

The NBH underlined that its baseline projection contains conditional projections; they are conditional in the sense that they do not take into account the impact of a possible change in the direction of budgetary policy.

“Next year, by cancelling the largest part of the available effective reserves (reserve appropriations of around 0.6 percentage point of GDP, without any expenditure title) the 3.8% deficit target may be attained," the NBH staff said in the Inflation Report.

There NBH’s economists believe there are four basic factors resulted in the deviation of their 2010 forecast from the target set forth in the budget act.

1) the secondary effect of the adjustment taking place within local governments, which adds to their deficit, is somewhat stronger than according to the Ministry of Finance;

2) the reduction of the MÁV support is not totally effective;

3) the NBH’s forecast pertaining to the personal income tax revenues is lower than the appropriation featured in the bill;

4) the expenditures of the budgetary organisations will be higher than indicated in the bill.

Processes seen in 2011

“The deficit expected for 2011 may more substantially exceed the target (2.8% of GDP) despite the fact that the level of the planned effective reserves is a considerably lower than in 2010. For the time being, we do not see the conditions for the planned deficit reduction as being in place. Further fiscal balance improving measures will be necessary to attain the envisaged deficit target," the NBH said.

In line with its forecasting rules, in relation to fiscal measures the NBH took account of the further easing adopted in case of the personal income tax planned for 2011 (cc. 0.6% of GDP).

“Considering that no proposals have been made to offset this missing revenue so far, a corresponding requirement may arise in the future, in order to attain the 3% deficit target. Considering that according to earlier experiences the improvement of the fiscal balance was implemented by reducing expenditures and increasing regulated prices, the fan chart includes their inflation-increasing and growth-reducing effect."

Note that the cyclically adjusted deficit would be already below the Maastricht criterion (3.0%) in 2010 and 2011 and only moderately above it in 2009. This presumed favourable budget balance development has been pointed out by a number of investment banks lately.

Based on the NBH’s assumptions, the quantified balance of accumulated debts and liabilities may be around 2.7% of GDP, “part of which - based on past experiences, in the case of transportation companies, roughly one-half - must be consolidated by the budget in the near future and accounted for in the budgetary balance."

Should the consolidation take place in part or in whole in the next two years, then this step would temporarily increase the deficit in the coming years, the central bank added.

Based on this - and calculating with a debt assumption worth 1.5 ppt of GDP - Hungary’s augmented (SNA) balance would be “only" 5.6% of GDP in 2010, which is way below the 7.0-7.5% estimate Hungary’s main opposition party Fidesz has been waving like a red flag recently. A gap of around 7.0% would materialise only if debt consolidation took place in whole in 2010.“In view of the current expenditure tensions, the growing consolidation requirement of indebted firms in state ownership represents an increasingly serious problem over our forecast horizon. A future consolidation may generate a significantly higher deficit at the time it is executed," the NBH said.

It noted, however, that consolidation will not necessarily have to be carried out in a single year. The great uncertainties surrounding the estimates stem from the unknown duration of the debt consolidation.

The table below shows the maximum amount of the risks that the NBH has been able to quantify on the basis of the information available. The economically justified and reasonable refinancing requirement is much lower than this, because if part (about half) of the debt were not consolidated, such would not jeopardise the normal course of the operation of state-owned companies.

Considering the above - and as the chart below also underpins - the upside and downside risks to the budget deficit fcast are mostly in balance for 2010, while upside risks outweigh downside risks for 2011 even though the central bank’s deficit projection is much higher than that of the government.

Additional systemic risks

“In recent years, significant tensions emerged in connection with the financial management of the state in a wider sense. If an ‘overall’ consolidation of debts accumulated outside the statistically interpreted general government but related to the general government in an economic sense also took place, the deficit in the coming years could increase by as much as nearly 3 percentage points of GDP. At the same time, alleviation of the accumulated tension was not complete in the past either, and all existing problems were not necessarily managed in a given fiscal year."

Upside risks for 2011
“The fiscal fan chart for 2010 is nearly symmetrical, while it indicates risks suggesting the development of a deficit that is significantly higher than the baseline projection. The 2011 asymmetry is the outcome of the deficit-increasing impact of the risks surrounding the macro-economic path, because each uncertainty item of the macro-economic projection adds to the deficit. The downward risks posed by GDP (and, within that, consumption), real wages and inflation result in lower revenues in an environment characterised by a lower nominal GDP level. Our expert risk perception is nearly symmetrical in respect of both years," the NBH said.

Other key items in the Inflation Report:

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