Economy 19 October 2021, 9:28am

Hungary will have a lasting debate with the European Commission - FinMin

Portfolio

We have a dispute with the European Commission that has a host of outstanding issues with Hungary and Poland, so this will be a lasting debate, said Finance Minister Mihály Varga at Portfolio’s Budapest Economic Forum conference on Tuesday. He underlined the importance of graduality in the reduction of the budget deficit, stressing that the shortfall could be back around 3.0% of GDP by the middle of the decade.

Addressing the rising number of COVID-19 cases in the latest resurgence of the coronavirus pandemic Varga noted that the ‘fourth wave’ will not be comparable with the previous ones in terms of their effects. Vaccination coverage is high, the danger is getting smaller but in view of the epidemiological data of the neighbouring countries the threat is real, he said.

If by saying that the danger is becoming smaller Varga referred to what he labelled as high vaccination coverage, the numbers do not underpin his view. The 3-day test positivity rate was 7.33% on Sunday which implies an accelerating spread of the Delta variant. Whereas the number of new COVID-19 cases is lower than a year ago, there are still “too many” people in hospital and in critical condition despite the 60% vaccination coverage (low and stagnating) and a possible cross-immunity gained in the previous waves.

You can compare the current situation with the one a year ago by examining the chart below. The three-day average of COVID-19 patients in hospital was 1,712 a year ago which compares with 886 currently, whereas the respective 3-day averages of the number of coronavirus patients on ventilator are 178 and 125. This means that there are about half as many people in hospital (due to vaccines and a possible cross-immunity there should not be that many either) than a year ago, yet only 30% fewer the differences are -48% and -30%, respectively.

As regards the local crisis management, Varga stressed that in the spring of 2020 the cabinet had to respond immediately to:

retain and create jobs;
restart priority sectors;
ensure subsidised loans;
protect families and pensioners.

He summed up the measures of the second wave in three points:

protection of jobs;
simplification of the tax regime;
strengthening of businesses.

In this period the government was aiming not only for immediate effect but also to adopt measures for the medium and long terms.

Varga said we can now talk about restarting the economy. The government decided in this phase about the 5% VAT on residential properties, the 13th-month pension, the tax exemption for employees under 25 years of age, and the interest-free rapid ‘restarting loan’. In the second phase the focus will be on supporting higher education and maintaining wage subsidies, and the following phase could be about green transition and digitalisation.

One of the uncertainties regarding the economy now is whether the momentum of the reboot will last or not. Economic growth is based on a solid foundation, he added.

We are slowly starting to see what shape the crisis will take, and a V-shape is clearly visible

, said Varga.

Besides coronavirus the other threat is inflation. An era of higher inflation is returning, which will also take yields higher, he noted. The minister said changes to monetary policy over the past six months were fully justified and timely. The question is how lasting the rise in inflation will be. The increase in energy prices is undeniable and that could fuel inflation further, he added.

We need to be ready that it will be more difficult to push inflation back to its previous range.

The government expects the trend to subside from early 2022 and that the situation will normalise by the summer. There’s a high chance that inflation will drop to 3.0% by the end of next year.

Varga highlighted that Hungary’s budget gap could decrease to 3.0% of GDP by 2024, stressing the importance of a gradual reduction. We learned after 2008 that if we restore it overly rapidly then we’ll start a new wave of recession, he said.

We have a debate with the European Commission which is highly motivated politically. The Commission has a host of outstanding issues with Poland and Hungary therefore

this debate will be persistent.

Varga said Hungary had no time to wait for the conclusion of this debate and that is why it had to issue Eurobonds at the end of September. The cabinet expects tensions with Brussels to subside towards year-end and an agreement to be reached on the funds of the Recovery and Resilience Facility (RRF).