Economy 23 June 2011, 12:31pm

Hungary to amend budget for the 2nd time in two weeks

Portfolio

Hungarian lawmakers have approved an amendment to the 2011 Budget on Monday over the purchase of a 21.2% stake in fuels group MOL by the state from Russia’s Surgutneftegaz. Two days later the Economy Ministry came up with an 85-page bill to amend the budget again.

The amendment proposal submitted to Parliament on Wednesday acknowledges that the revenue side of the budget had been planned wrong last autumn; and that is why a HUF 250 bn spending freeze (stability reserve) was needed, HUF 182 bn of which affected government chapters.

In February, when the stability reserve was announced, Economy Minister György Matolcsy cited unpredictable money markets and renewed hits from the global economic crisis (i.e. serious external risks) as the reason for earmarking those funds. Now the ministry admits it made a mistake planning the revenues.

The slippage was first pointed out in the Convergence Programme sent to Brussels in mid-April this year.The 85-page document details the HUF 182 billion freeze to the last million of forints, which is a laudable deed, considering that the cabinet has so far been keeping such details hidden and gave in only to a litigation threat by the Fiscal Responsibility Institute, providing the requested data to the civilian overseers.

What has not been known so far is how overplanned the ministry thinks revenue targets are. According to the bill, the budget will have HUF 84 bn smaller corporate tax revenues, a HUF 69 bn slippage in VAT revenues and HUF 16 bn smaller revenues from the Simplified Entrepreneurial Tax (SET or EVA in Hungarian) than originally planned.

At the same time the ministry sees no reason why personal income tax (PIT) revenues should not be collected as envisaged in the 2011 Budget.

The balance of the amendment proposal is (almost) zero, given it lowered both the revenue and spending sides by HUF 182.12 bn, i.e. the deficit target remains unchanged.

Looking at the governing parties lawmaking practices, however, the individual law amendment proposals that may be submitted in the future - these are generally brought before Parliament days or hours before the debate and vote, and are passed thanks to the Fidesz party’s two-thirds legislative majority - may lead to a rise in the cash flow deficit.

And MPs could be even encouraged to come up with such proposals, considering that the accrual-based (ESA-95) balance can show a surplus of up to 2% of GDP this year.

A few weeks ago the Budet Act had to be modified because the state bought the 21.2% stake of Russia’s Surguneftegaz in Hungarian oil and gas group MOL for EUR 1.88 bn.If - or more precisely when - lawmakers nod on the amendment proposal, the 2011 budget revenue target will drop to HUF 12,970.821 billion from HUF 13,079.153 bn in the original budget law. Meanwhile, the expenditure goal is to be reduced to HUF 13,656.49 bn from HUF 13,767.94 bn. As a result the cash flow deficit target will be modified to HUF 685 bn from the original HUF 688 bn. According to the proposal the Health Insurance Fund’s deficit will reach HUF 87 bn (less than originally expected).

Note, however, that as of this Monday the new full-year deficit target is HUF 1,184 bn (due to the MOL deal). So, should MPs approve the ministry’s proposal, the deficit goal will be reset to HUF 685 bn. So, seemingly the budget amendment proposal approved on Monday will be neglected, along with the HUF 500 bn extra spending caused by the purchase of the MOL stake.

This “misunderstanding" was most likely caused by timing issues, since the MOL deal had to be rushed through Parliament and therefore must have preceded the amendment linked to the stability reserve by chance.The Ministry of National Resources, which is in charge of health care, culture and education, was most affected by the spending freeze, losing HUF 39.2 bn. The Ministry for the Interior was stripped of HUF 34.96 bn, and the budget of the Defence Ministry was slashed by HUF 26.32 bn.

The National Development Ministry’s spending was curtailed by HUF 21.1 bn; the Ministry for Rural Development lost HUF 18.75 bn and the Justice Ministry HUF 15.77 bn. A HUF 13.26 bn spending freeze hit the National Tax and Customs Office and the National Economy Ministry’s budget was also cut by HUF 5.9 bn. There was also a spending freeze of HUF 2.1 billion at institutions in charge of pension and health insurance administration.