Hungarian gov't completely rewrites 2023 budget by decree, here are the biggest surprises

What is missing

The government has made major changes to the 2023 budget, according to a decree published in the Hungarian Official Gazette. The overall macroeconomic trajectory, the revenue and expenditure amounts, the size of the budget deficit and the expected debt trajectory have also been changed. We have never seen such a major change by decree.

The government waited almost until the last minute: two days before the deadline, it published its decision on "different rules for the 2023 central budget in the context of the state of danger" in the Hungarian Gazette No 220. With this rewriting of the main figures, it can be said that

the government has effectively created a new budget.

In this light, it is particularly painful that the regulation is very short, that we have a feeling of incompleteness in many respects, that the level of detail is very low compared to the budgetary material that we can see in the context of the normal parliamentary bill, and that it is difficult to compare it with the original version. The icing on the cake is that we also do not know how the new 2023 plans (e.g. the main expenditure and revenue lines) compare to the expected outturn in 2022 (although the government certainly knows this with a very good approximation, as we are in the last days of 2022).

Since the regulation does not include the table entitled "BALANCE SHEET OF THE CENTRAL SUB-SYSTEM", traditionally the most important table in the whole budget document, it is extremely difficult to answer the most important question. Namely, which expenditure lines the government has cut, which it has added, where it has increased revenue, and what measures are behind the changes in these amounts. After a detailed examination of the main budget chapters, one of the annexes to the decree, we can give an approximate interpretation of exactly how the expenditure side (which has increased by HUF 6,400 billion (i.e. by almost 20%) compared to the original summer plans) is structured (where it has been cut and where it has been increased) and how the revenue, which has increased by HUF 5,380 billion (17% !), has been achieved.

The regulation did not come as a surprise in that the possibility had already been raised that this budget document would not meet the basic criteria of transparency in all respects. However, this degree of loss of comparability falls short of our expectations. Let us call this development the first unpleasant surprise.

It is also interesting to note, as a second unpleasant surprise, that one of the most important changes, the increase of the deficit target from 3.5% of GDP to 3.9%, is not included in the regulation, which also means that the government does not specify how this accrual (ESA reported to the EU) deficit is structured (primary balance, interest balance, ESA bridge rate). All that is known is that the cash deficit could increase by HUF 1,000 billion, partly due to the relief of the deficit and partly due to the fact that the GDP-to-GDP figure will be lower due to higher inflation (15%) and a much higher nominal GDP (16.6% increase).

The preliminary budget information has been the subject of several articles in recent days:

Tax revenues make the government's job easier

Despite the above, an attempt can be made to draw some main conclusions. Let's start on the revenue side. From the detailed comparative table we have compiled below, we can see that

• the government has increased direct budget revenues by HUF 2,253 billion (explained in more detail below)
• and expects a HUF 2,000 billion increase in the Overheads Protection Fund revenues, but if we exclude the HUF 1,200 billion central budget support, this leaves a revenue increase of HUF 800 billion (explained in more detail below)
• The government expects HUF 155 billion more revenue from EU cohesion programmes,
• an increase of HUF 120 billion in debt service revenues,
• and an increase of HUF 652 billion in revenues from the Pension Insurance Fund compared to the original summer plans, which is related to the fact that the government expects an increase of HUF 360 billion in contribution revenues from this fund compared to the original plans, while also increasing budget support to cover extra expenditure.
• In the case of the Health Insurance Fund, the government expects an additional HUF 115 billion in revenue compared to the original plans. This is due to the fact that the government expects a total increase of HUF 200 billion in social contribution tax and contribution revenue, while reducing the budget support for E-Fund by HUF 140 billion.

To better understand the underlying processes on the revenue side of the budget, it is therefore worth examining where exactly the government sees realistic prospects for growth in direct budget revenues and in some lines of the revenue of the Overheads Protection Fund. In this respect, the following developments may be salient:

• The government expects an increase of HUF 908 billion, or 30%, in payments by business organizations compared to the plans presented in the summer.
• Within this, the government sees a real chance in the corporate tax to raise HUF 212.9 billion more than originally planned, but it does not elaborate on the processes behind this (it is easy to imagine that this is already linked to the introduction of the global minimum tax in 2023). This is also something of a surprise.
• The government also expects higher revenues from several special taxes than in the summer plans, such as the HUF 473 billion increase in the energy sector to HUF 716 billion, which includes the 95% special tax on Mol and the recent increase in the income tax on energy suppliers. This increase comes as no surprise after the announcements of previous weeks.
• Another surprise is the brand new budget revenue line "energy sector dividend payments", where the government expects a total of HUF 107.5 billion, which will be put into the Overheads Protection Fund. It is not known who will be subject to this payment obligation: the state energy companies (such as MVM, which is stuffed with huge public funds?) or the competitive sector?
• And for several other special taxes and extra-profit taxes, the government expects higher revenues than a few months ago for the full year 2023, due to a higher tax base resulting from higher inflation. Examples include the bank tax, the special retail tax, the special tax on financial institutions, the airline contribution, and partly the insurance tax (where the increase in top tax rates will play a role).
• Similar developments have led to a rise in the government's expectations for consumption tax revenues, by nearly HUF 1,000 billion (!). For example, in the space of a few months, the government has raised VAT revenues by 12% to HUF 7,985 billion, compared to HUF 7,099 billion previously expected. In other words, the 15% inflation rate against next year's average inflation rate of 5%, as originally planned, will have a huge impact on consumption-type revenues, and this will compensate to a significant extent for the slippage in the budget.
• In the meantime, the government also increased personal income tax revenues by 9% to over HUF 4,000 billion due to changing macroeconomic trends and higher wage outflows.
• It does not seem to be a significant change compared to the hundred billion HUF items, but the amount of the municipal solidarity contribution to be paid by some municipalities will increase from the original HUF 217 billion to HUF 237 billion, presumably in the context of higher local business tax revenue expectations.

Overall, on the revenue side of the budgetary redesign, we can say that the government has taken both active and passive steps to rebalance the budget, but the same cannot necessarily be said for expenditure.

Some surprising items on the expenditure side as well

We are not in an easy position when it comes to presenting the most important changes on the expenditure side. It may help, however, to be able to compare the new expenditure estimates for the main budget headings with the summer figures (as shown in our last detailed table below). What is striking at first glance is that, for example, the Ministry of Finance will see a significant increase in expenditure in connection with the increase in reserves (the general reserve of the budget will rise from HUF 170 billion to HUF 255 billion, for example), while the Ministry of Construction and Transport will see an increase of HUF 1,300 billion, presumably linked to the restructuring of the ministry's tasks (in return, the Ministry of Energy, formerly known as TIM, will see a reduction of HUF 1,700 billion). Other significant increases are the HUF 460 billion of extra spending on EU development, the HUF 430 bn increase in public debt financing (with higher interest expenditure), the fall in pension expenditure and the rise in Health Insurance Fund spending.

The largest increases are in the Overheads Protection Fund and direct expenditure (as well as in revenue), with expenditure increases of HUF 1940 billion and HUF 1605 billion respectively compared to the summer plans. A significant part of the increase in direct expenditure is explained by the central budget's support to the Overheads Protection Fund and the Defence Fund, totalling nearly HUF 1 500 billion.The skyrocketing of the Overheads Protection Fund's expenditure is due to one main factor: Hungary's energy bill will rise more in 2023 than the government had envisaged in the summer, and the state is trying to take on as much of this burden as possible: Not only by financing the residential energy bill reduction scheme, but also by higher energy bill compensation for public bodies (HUF 400 billion), compensation for local governments (HUF 144.7 billion), support for church and civil institutions, assistance to state-owned companies and programmes for the competitive sector. Seeing the final amount beyond the residential cuts, we believe that it is unexpected and, from this point of view, surprising that the government is digging so deep into its pockets to help non-residential operators when it comes to paying the increased utility bills.

One of the positive developments in the draft budget decree, in our assessment, in terms of transparency, is precisely the Overheads Protection Fund, which is surprisingly (almost completely) detailed compared to other elements (except for what the revenue line "dividend payments from the energy sector" actually means). Let this be the first positive surprise. That is why it is worth juxtaposing the structure of the Overheads Protection Fund announced in the summer and the one announced now.

In addition, some very interesting changes in some expenditure items can be identified:

• A major new development is an unexpected increase in payments from central budgetary bodies from HUF 27 billion to HUF 312 billion.
• We can only speculate, but presumably this higher amount is linked to the second annex of the decree, which lists HUF 250 billion in payments to be made to various ministries. In other words, the government is trying to make further savings on its own to a lesser extent, but the implementation of this is not yet known, so there is a risk of inefficient and ineffective spending cuts in the long term.
• The government has reduced the availability fee for the motorway network under the Ministry of Construction to HUF 182 billion next year, compared to the original HUF 230 billion (this is the cost of the new motorway concession), while the M5 and M6 motorway availability fees have increased from HUF 151 billion to HUF 165 billion.
• Another interesting change is that the government is renaming the item called priority government investments in construction to public investments, and instead of the HUF 261 billion planned in the summer, the state plans to spend HUF 580 billion next year. A real surprise, which has not been announced at all, is that a public road investment item of HUF 306 billion and a public rail investment item of HUF 41.5 billion appear in this heading. Such budget expenditure lines were not included at all in the summer law. Meanwhile, also in this chapter, the government is reducing the line for individual investments in building construction from HUF 215 billion to HUF 202 billion, the investment reserve is being reduced from HUF 20 billion to HUF 10 billion, and the HUF 11 billion subsidy for the Investment Agency is no longer included in the budget.
• A significant change, but one that was expected, is that the support for the restoration of the 13th month pension has been increased from HUF 372 billion to HUF 418 billion. In addition, the government planned to transfer HUF 270 billion more than the original amount to the pension fund next year.
• Another change affecting the pension fund is that expenditure on old-age pensions for those over the age limit will increase from HUF 3 663 billion to HUF 4 178 billion. And the Women40 programme will cost the state HUF 440 billion next year, compared to HUF 372 billion planned so far. Widow's pensions will rise from HUF 420 billion to HUF 458 billion.
• For the Health Insurance Fund, the planned target of HUF 704 billion will rise to HUF 754 billion, probably linked to the expected increase in the wages of nurses from the second half of next year.
• The Integrity Authority will have a budget of 17.1 billion HUF next year.
• The Directorate-General for Auditing EU Funds has HUF 3.9 billion to spend.

Let's put this into context

There is also a more far-reaching consequence of the new 2023 budget, which was announced in the last days of the year and is in many respects incomplete and opaque: its credibility could be fundamentally called into question. Indeed, huge changes have taken place in the world in recent months that have affected the foundations of next year's budget, and thus necessitated a rewrite of government plans. However, what guarantee is there that the government will not decide in the course of the year to make changes of such depth and scope that the version of next year's budget that is currently known and agreed will once again be completely overturned? In recent years, the transparency and credibility of the budget (as it has been significantly rewritten by various government decrees during the year, i.e. it has changed during its implementation) has been noticeably reduced, and with this 86-page document, the credibility of the government's plans has been further eroded.The only thing that can save this negative trend would be for the government to add to the 2023 budget decree the information that one would expect (which it usually presents in a budget proposal, for example in the multiannual outlook chapter) and new details, such as the impact of the various economic policy measures taken since the summer on the budget and on economic trends (a thorough impact assessment would be needed in such an uncertain and information-poor situation). We are curious to see whether such a turnaround will occur during the parliamentary discussion of next year's budget, which is unexpectedly announced for mid-January.

Cover photo: the building of the Hungarian Parliament, which the government has bypassed with this budget decree, thus repealing parliamentary oversight. Source: Getty Images