Economy 13 July 2012, 9:10pm

Parliamentary vote plants HUF 400 bn landmine in 2013 budget

Csiki Gergely

The cornerstones of Hungary's 2013 budget were approved MP's on Thursday. Rather than lending to support market confidence, however, the outcome of the Parliamentary session was heightened uncertainty, due to modifications to the government's job creation program prior to the vote which increased risks to meeting the deficit target. Fiscal strain on the budget may easily be on a scale of nearly HUF 400 billion (1% of GDP).

Hungary's Parliament approved next year's key budget figures more than three months earlier than usual. The vote staked out HUF 15,733 billion government expenditure next year, with revenues expected to total HUF 15,083 billion. As a result of the last-minute amendments, the deficit target has shrunk from HUF 677 billion to HUF 653 billion, which might appear as good news at first sight. However, a lower deficit target comes with significant risks as a result of easing fiscal restraint by a significant degree in the final version of the proposal yesterday.

Originally, the 2013 budget deficit target was set at 2.2%. While this earlier version was not without risks, however these were not significant (i.e. the target seemed attainable with minor modification).

Minefield in the budget

However, the situation has changed considerably as a result of governmental decisions over the next few weeks. The government is allowing about HUF 300 billion to escape from the 2013 budget for which cover is not guaranteed. In Portfolio.hu's view, the total value of uncertain or transient items on the revenue side is almost HUF 400 billion, or 1.3% of GDP.

Whilst the budget is built on a projected 1.6% economic growth rate, the government is now estimating 2% in everyday practice after it adjusted the revenue side by a HUF 40 billion item expected as the positive macroeconomic result of the job protection program. A higher growth prognosis might also raise eyebrows in light of the fact that Economy Minister György Matolcsy raised the amount of budget reserves by HUF 50 billion as a precaution in light of a less favorable economic growth outlook.

The government's overly optimistic view of the positive impact of EU/IMF talks on debt service (the government projection is HUF 100 billion, in sharp contrast with a HUF 30 billion central bank estimate) could be the source of fiscal strain next year. Another question is the realization of transaction tax revenues the government is expecting to collect from the National Bank of Hungary and the State Treasury. Levying a tax on the central bank could posssibly constitute a breach of EU law (in addition to having only a short-term positive impact on the fiscal balance); as concerns the Treasury, there are risks associated with the latter passing the costs on to transaction partners. Also surrounded by uncertainty are most of the projected HUF 160 billion additional tax revenues as a result of more stringent tax collection, as well as the government's decision to 'round up' the VAT revenue target by HUF 15 billion without taking any new measures to substantiate the new projection to create room for miscellaneous items on the expenditure side.

In the table above, the impact of excise tax hikes and more targeted taxes on unhealthful foods has not been shown as separate items, as the government has already 'spent' this HUF 51 billion amount on wage hikes in public healthcare so net balance of these measures is zero.

EU and IMF scrutiny expected

In the event that risks events identified above occur, the budget gap may grow as wide as 3.5% of GDP, as opposed to the 2.2% target. The big question is what the European Commission and International Monetary Fund mission visiting Budapest next week is going to say to those perilous budget amendments; whether Hungary will be requested to make changes (especially to the revenue side); or whether the government is going to take those steps when a debate is reopened to discuss the specifics in the fall. In light of the above, one can expect to see a shift in the focus of credit talks from structural reform to fiscal adjustment measures needed to balance the budget.

All in all, the delegation's view of the 2013 budget is not at all irrelevant to the success of credit talk, and moreover it could be considered in the ongoing excessive deficit procedure against Hungary.