If the Hungarian economy grows by 1% less than the government’s 3% target (which is currently awaiting revision) in 2012, further HUF 100 billion fiscal adjustment will be needed on top of what is in the Széll Kálmán Plan, a package of reform measures, to meet the budget deficit target, local news portal origo.hu reported on Wednesday.
You gotta admit there is something wrong here
Even the most optimistic people had to face the fact that the Hungarian economy is not on the growth path that the government envisaged in its conservative estimates. The weaker-than-expected performance may force the cabinet to rethink the bases for budget planning, said András Kármán, Secretary of State at the National Economy Ministry, in a interview with Reuters on Tuesday. He said the government will wait for the breakdown of Q2 GDP data (8 Sept) before deciding on any revision in targets.
The Economy Ministry will have about three weeks to look into the matter, as - according to its earlier information - the 2012 budget bill will need to be submitted by 30 September.
"New macro forecasts will be linked to the (2012) draft budget and that may include changes (in the forecasts). Certainly tax revenue forecasts must be based on this reassessed macroeconomic course," Kármán said.
This is the first statement by a government official that reacts in merit to the warnings sings of the past weeks. A month ago economy ministry officials said there was no reason to revise the growth prognoses. It is a favourable message for the markets that the government realised its growth plans, which serve as the basis for next year’s ambitious fiscal adjustment targets, may in fact be in danger.
Should the GDP forecast be brought lower and the related tax numbers are adjusted downward also (VAT revenues, PIT revenues) then the cabinet will need to find additional sources so that it could meet its 2.5% of GDP deficit target in 2012.Smaller growth = bigger deficit
Origo.hu learned from sources taking part in the planning of the budget that the a single percentage point undershoot of the 3% growth target would hit a 0.3-0.4% of GDP whole in the budget balance. In forint terms a 0.3-0.4% of GDP negative impact means the budget shortfall would be HUF 90-120 billion higher next year due to the worse economic outlook.
Origo pointed out that this is how much the government would need to top up its HUF 550 billion adjustment package laid down in the Széll Kálmán Plan (and a somewhat bigger one set in the Convergence Programme). This would be even bigger than the HUF 600 bn balance improvement the central bank (NBH) thought in mid-July would be necessary.
The portal says one of the possible means by which further adjustment could be achieved is putting the crimp in the phasing out of super-grossing, which would in itself improve the balance by HUF 140-160 bn. Another possibility is to ban companies from accounting all their losses in profitable years.
With regard to the tax measures we need to clarify that according to current plans there will be no further tax cuts overall in 2012, only a rearrangement of taxes.
Origo.hu reported already in May that the government was considering dropping the plan to end supergrossing - operating the tax base at 127% of gross salaries instead of 100% - by 2013. Under Hungary's supergrossing system, a 16% flat income tax is being levied on social taxes in addition to gross income. Under the current phase-out plan, budget revenues would decline by hundreds of billions of forints next year (when supergrossing is supposed to be halved) and even more so in 2013, when it should fully disappear.
While halving supergrossing would have a negative impact on budget revenues, the tightening of tax credit would offset it, according to the Convergence Programme. Therefore the ever so popular ‘delay of tax cuts’ media reports have little meaning or could be interpreted in two ways:
(1) The personal income tax regime will remain, the current regulations will no change. Based on the aforementioned this would not make the 2012 budget outlook any better, only the rearrangement of taxes would not take place.
(2) The tax base would not be reduced (the 1.27x multiplier on gross wage would remain), but tax credit would be cut. This on the other hand would be more than just a delay in tax cut, it would indeed equal a tax hike. But this is the only way to improve the budget situation via tax means.Data showed yesterday that annual economic growth slowed to 1.5% in Q2 from 2.5% in the previous quarter, well below analysts' 2.3% forecast, and the q/q figure was flat. Analysts called the numbers disappointing.
“[...] we believe stalling momentum in trade has been fundamental to the drop in quarterly growth rates for both countries, though we think the sharper fall in Hungary’s growth is down to moves in CHFHUF impairing household balance sheets and dampening consumption, and non-existent credit growth means household consumption and corporate investment cannot be supported through a recovery," said Peter Attard Montalto, analyst at Nomura in London, in a research note yesterday.
Prime Minister Viktor Orbán will hold a press conference today at 15:00 CET on the impacts of the euro crisis on Hungary.
The National Economy Ministry said the lower-than-expected growth figure does not jeopardize the deficit goal. The Stability Fund was brought to life specifically for such cases, it said, adding that this way the cc. HUF 90 bn negative impact can be safely financed.
The government remains committed to reducing state debt and restoring the balance of thee budget and it means to adhere to this commitment also in the planning of the 2012 budget, it added.
Several analysts have already expressed concerns that the current (conservative) GDP forecast is overly optimistic and so the budget target could also be missed.
“[...] growth slowdown will raise concerns about attainability of fiscal targets so road to policy easing could be delayed further," BNP Paribas said in a note to clients on Wednesday. “We still see some room for decline in rates and yields in the CEE but we would imagine that some profit taking on front ends could make bellies of curves more attractive," it added.
Lower growth also means political test
In Montalto’s view, the concern for both Hungary and the Czech Republic, is that the slowdown in global trade momentum will only really hit in the third quarter of 2011.
“Czech is clearly entering this period from a much stronger base and has nascent credit growth and the lack of a fiscal drag to support it - though we think growth will clearly be lower through H2 still. Hungary, by contrast, is not supported by these factors. Indeed, the fiscal drag from the reform package is only just about to hit through year end, while CHFHUF moves were much worse in Q3 than in either Q1 or Q2 (was actually broadly flat through H1 - in Q3 it is likely to have, on average, sold off by 15% vs the previous quarter)," he said.
Montalto believes that this will add “a further substantial drag" on household and corporate balance sheets. “Funding miss matching from mortgage reforms will continue to keep credit growth restrained too through Q4," he added.
The analyst said lower growth will be a “political test" in both countries. In Hungary he thinks the real test of the governing right-of-centre Fidesz party’s multi-target programme (growth, the “war on debt", fiscal consolidation and structural reform) will be put to the test, even more so than Montalto thought previously.
He continues to believe that “it will continue with politically costly structural reforms through next year, though this will come at the expense of missing deficit targets by a wider margin and at the expense of growth (that is when the real fiscal drag will hit). The likelihood of one-off measures to lower debt is also high (including the sale of a stake in MOL)."
Overall, Montalto continues to believe in the face of lower growth Fidesz will maintain its belief in its reforms to boost growth (even though as he has often argued it requires growth to be “activated" first) and prioritise debt reduction, followed by structural reform.
We have made some forecast changes for the next few years because of the above factors and a bleaker external view.
Montalto has lowered his growth forecast to 1.9% this year and 1.6% next year, from 2.7% and 2.8% previously.
“This reflects the removal of external recovery factors, revealing the lack of internal dynamic and also the effects of fiscal drag materialising as structural reforms take effect next year and are further evident in our new lower growth forecast for next year. It also reflects the downside surprise to our Q2 GDP forecast. However, this forecast is heavily reliant on CHFHUF levels," he said.
The analyst maintains his rates on hold view despite his other forecast changes because of the ongoing view that the MPC is restricted by its wish to “do no harm".
Nomura sees rates on hold until the end of 2013, while its budget forecasts have shifted to a deficit of -4.0% of GDP for next year and a deficit of -3.1% for 2013 - “next year remains the largest miss vs. the government’s targets."
Lower growth also means it will take longer to reach a sub-70% debt to GDP - Montalto now sees that occurring at the start of 2014 not the start of 2013 as previously thought.
“This alone may be sufficient to keep the government trying to reduce debt dramatically through next year, but may well result in further one-off measures."
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