Details emerge on the 2023 Hungarian decree budget

The Fiscal Council, chaired by Árpád Kovács and composed of György Matolcsy, President of the MNB and László Windisch, President of the State Audit Office of Hungary, has published its latest opinion entitled "On the Draft Government Decree on the Different Rules of the Central Budget of Hungary for 2023 in the Context of the State of Danger and on the Position on the Compliance with the Public Debt Rule".

An interesting feature of the document is that the signature of György Matolcsy is missing at the very end of the 16-page opinion. The reason for this is not known, but it is noteworthy especially in light of the fact that the last few weeks have been noisy with the ongoing debate between the central bank Governor and the government (e.g. on price freezes, inflation).

In its Opinion, the KT recalls that Mihály Varga sent them the document on 23 December. It also stresses that the changes since the adoption of next year's budget in the summer show that the KT's earlier calls for attention have been justified. The three-member body met on 27 December and adopted a decision on the decree budget for 2023.

Among the main findings of the document that will characterize the new budget, which is expected to be published in the next few days, the first is that the government is basing the budget on economic growth of 1.5%. The system of overheads cuts will be maintained, pensions will be increased at a higher rate than originally planned (this was known, as the pension increase of 15% is expected at the beginning of the year), and support for families will continue.

The state will partially compensate for the increased energy costs of public institutions. The state will also have to pay substantially higher interest expenditure next year than originally planned.

The ESA deficit rises from the original 3.5% to 3.9% of GDP, which is the most important and perhaps the most critical change when compared to the communication and promises of the last few weeks (last week, Finance Minister Mihály Varga was still talking about a 3.5% deficit target).

The promise remains that if GDP grows more than planned next year, the government will use the extra revenue to cut the deficit. Here, the KT calls for the deficit to be reduced to 3%.

The KT considers that there is a risk to the revenue and expenditure estimates in the draft regulation. The increase in tax revenues is based on a significant increase in wage and earnings growth and nominal consumption, and in some lines exceeds the expected increase in tax bases.

On the expenditure side, the draft regulation includes an increase in expenditure appropriations to finance energy costs, but the increase in operating expenditure is not as high as the increase in operating costs is expected to require.

The nominal GDP will rise by 16.6% next year, which will support the reduction in public debt. The debt ratio is projected to fall from 74% to 70.2%.

Expenditure appropriations of the Overheads Protection Fund for 2023 increased from HUF 670 billion to HUF 2610 billion. The amount earmarked for maintaining the preferential tariffs for household energy consumption up to the average level of consumption increases from HUF 600 billion to HUF 1458.2 billion. Energy bill compensation for state institutions, state-owned enterprises, and municipalities has increased to HUF 855 billion. Here, the KT mentions in the document that the scope of the institutions concerned is wider.

The state will also use the Overheads Protection Fund to pay for the costs of the energy crisis rescue programmes for the private sector, with a total of HUF 279 billion earmarked.

Expenditure will be covered by the transfer to the Fund of the expected revenue from the "extra profit" special taxes and the mining levy introduced in June 2022, totaling HUF 1411.7 billion, and by an additional HUF 1198.3 billion in central government support.

The main expenditure of the Defence Fund has not been changed compared to the original appropriation in the Finance Act, but the resource structure of the Fund has changed. Financial transaction tax revenue has been removed from the Fund's revenue, and in its place, HUF 358 billion from payments by financial institutions and HUF 219.4 billion expected from insurance tax, in addition to HUF 264.6 billion in direct central budget support, will ensure the coverage of the planned expenditure of HUF 842 billion.

Net cash interest expenditure increased by HUF 310 billion in the amendment compared to the original budget law. The higher net expenditure is due to a HUF 430 billion increase in gross interest expenditure and a HUF 120 billion increase in interest receipts. The increase in interest expenditure is explained by the rise in yields since the drafting of the Budget Act.

The main amount of central reserves increased by HUF 418.2 billion to HUF 977.2 billion compared to the original Budget Act appropriations. The appropriations that can be considered free reserves amount to HUF 462.7 billion. The government contingency reserve margin increased from HUF 170 billion to HUF 255 billion, in line with the increase in the central budget's expenditure envelope. The appropriations for the provision for government wage measures increased by HUF 335.2 billion to HUF 514.5 billion compared to the appropriations in the initially adopted budget law. At the same time, a new purpose has been added to the use of the appropriation, the Council's opinion says, but it does not say what this new purpose is.

HUF 2285.69 billion and expenditure to HUF 3793.5 billion, exceeding the expected outturn for 2022 by 44.2 and 28.3 percentage points respectively. The budget realistically expects EU revenue to come in to finance the Instrument for Recovery and Resilience and the operational programmes for 2021-2027. Nevertheless, the advance payments for these programmes from the central budget remain significant.

How to evaluate the information published so far?

The 16-page opinion of the Fiscal Council gives us more important details on the 2023 budget, which the government will implement by decree, bypassing the parliamentary decision-making process. The most important of these is that the 3.5% deficit target, which has been set in stone until now, is unexpectedly raised by the government, albeit only by a cautious margin. The other important piece of information is that the government has increased the amount of the Overheads Protection Fund by a massive amount: almost HUF 2000 billion. This increase can only partly be explained by the increase in the cost of the residential overheads reduction scheme (expensive gas and rising energy prices), and partly by the fact that the Overheads Protection Fund is being increased to this level because the government is providing energy bill compensation to a wider range of public institutions than previously planned, and is paying for the bail-outs of the competitive sector (presumably the energy-intensive SME programme and the factory bail-out). 

In addition to all this, important details remain to be seen, perhaps the most important of which is what new elements the government will introduce to cover the costs of the Overheads Protection Fund and how much this will be based on revenue raising (see the special taxes on pharmaceuticals and insurance companies published on Friday) and spending cuts. In the past, the government has strongly argued that the budgetary adjustment since the summer is predominantly based on spending cuts, signaling that the adjustment structure is more market-friendly. The big question is whether the new budget will stand the test. However, if we put the new draft budget in a broader perspective, the information available so far suggests that the fiscal policy, after its spectacular spending spree ahead of the 2022 spring elections, is now forced to be pro-cyclical (i.e. it can not really cushion the effects of the crises), but tries to be the least pro-cyclical (by raising the deficit target) and the government is confident that this will be accepted by the market, investors and rating agencies.

Cover photo: Minister of Finance Mihály Varga (l) and Árpád Kovács, President of the Fiscal Council (r), shake hands during the general debate on the proposal on Hungary's 2021 central budget at the plenary session of the National Assembly on 10 June 2020. Source: MTI/Tamás Kovács