Tough austerity measures included in the 2023 Hungarian budget

With the government finally submitting to Parliament the rewritten version of the 2023 budget, which has already been adopted by decree, and the Finance Ministry publishing on Monday the detailed cash flow figures for the 2022 budget, the ideal situation is that this year's new budget figures (both on the revenue and expenditure side) are comparable with last year's. But the question many may ask is what is the point? The most important advantage is that by comparing these figures line by line, we can get a picture of

what the government's priorities are for 2023 and how well-funded and revenue-based these targets are.

The big picture

The new 2023 budget is the subject of several analyses published on Portfolio. On the one hand, we were the first to present the decree budget at the end of the year, and we also gave a quick opinion on the 166-page version submitted to Parliament last week. In summary, we can say that the government has adapted this year's budget plans to a radically changed economic environment, i.e. to the realities of the situation, and is facing the consequences of the energy crisis in particular. The government will finance the soaring overheads, much higher pension expenditure, surging interest expenditure, increased safety reserves and spending on public assets partly from the huge increase in VAT revenues due to falling inflation, further increases in special taxes, rising personal income tax and contribution revenues, cuts in spending by ministries and other institutions, and the devaluation of some subsidies. But this is only partially sufficient. It has not been able to fully fill the much larger newly created fiscal hole (and maintain the deficit target of 3.5% of GDP) and has therefore moderately increased the deficit target (to 3.9%). However, it is also worth examining what the new macro-pathway offers and how the government is using it.

Explicit and implicit savings on the expenditure side

On Monday morning, the Finance Ministry published the full annual detailed cash expenditure and revenue lines for the 2022 Budget, which is a good time for us to assess the government's plans for 2023 in the light of these. It's worth starting our analysis with the expenditure side, where there are some striking changes when comparing the individual lines. First, here is a detailed table showing how each expenditure item in the budget changes this year according to the government's plans compared to last year's figures.

The detailed table above shows that the government will

implement partly explicit and partly implicit spending cuts or savings in 2023.

In practice, this means that there will be some targets for which it will spend less than last year's actual figures, while funding in some areas will be significantly below the 15% inflation rate officially expected by the government. This means that a number of areas will lose out in real terms in the 2023 budget.

These are the areas where the government will make real savings, i.e. spend less than in 2022:

• Housing subsidies could be 40% lower than last year, the government plans to save HUF 252 billion on this.
• For social fare subsidies, the planned spending is 11% less (compensation for public transport tickets).
• The government plans to make huge cuts in the budget bodies and in the chapter management appropriations: it plans to spend HUF 3094 billion less on these than last year's HUF 12202.9 billion. Unfortunately, there is no detailed explanation in the bill, but presumably specific government spending in 2022 will be cut this year, while on the other hand, investment in institutions will be cut (2022 Investment Fund allocation of HUF 550 billion vs HUF 200 billion in 2023), and thirdly, the obligation of budgetary bodies to pay HUF 250 billion will contribute to this. However, one could easily identify the risk on this line, which the Fiscal Council already drew attention to at the end of last year. That is, if spending on non-personnel expenditure does not rise as much as the increase in operating costs is expected to require, this carries substantial risks to deliver even with extraordinary austerity measures, as the government was last warned. Just for the record, we note that the planned expenditure of budgetary bodies for 2023 is the same in billion forints as the 2022 target (HUF 5,386.2 billion).
• Local governments receive less on the subsidy side (apart from the overhead compensation).

Areas that will be losing out in real terms (especially if the average inflation rate this year exceeds 15%):

• The National Fund for Family and Social Policy will increase by only 5.5%, with spending on family support increasing by only 2.1%. In other words, the criticisms of experts that the government is giving with one hand - as it is doing everything in its power to defend the cuts in rationing and thus providing substantial financial support for families - and saving with the other, thus devaluing cash family benefits, are valid.
• The expenditure side of social security funds will increase by 12.3%, while inflation could be as high as 15%, according to the government.
• Within this, the Health Insurance Fund does not fare as well as it might first appear, with expenditure rising by 7.9%, while the preventive health insurance fund (i.e. funding for hospitals) is up by only 4.6% and the subsidy for medicines by 7.2%.

It is also worth noting which targets the government will visibly spend more on, to identify the priorities of economic policy, i.e. what the money will be spent on this year:

• Individual and normative subsidies will more than triple compared to 2022, linked to the increase in the overheads protection fund.
• The government would spend more money on EU programmes than last year's figure: HUF 3793 billion vs HUF 2991 billion.
• The higher interest rate environment caused by rising inflation is sucking money out of the budget through interest expenditure: after HUF 2,100 billion, the government is forced to spend HUF 2,500 billion on interest, meaning that it is becoming increasingly expensive to finance the operation of the state.
• The government expects a spectacular increase of 21.2% (HUF 245 billion) in spending on state assets, which could easily be linked to the partial state purchase of Vodafone.
• Pension expenditure will rise by HUF 754 billion (15.7%) to HUF 5545 billion.

Taxes squeezed by inflation

After the expenditure side, it is worth turning to what tax revenues the government expects to see in the new 2023 budget.

• The government expects payments by business organisations to rise by 36% this year, from HUF 2,894 billion to over HUF 3,900 billion.
• Within this, corporate tax revenues could explode by 35%, according to official forecasts. The government expects this line item to be HUF 260 billion higher than last year. A few sentences in the government's budget bill could be linked to the explosion in corporate income tax revenues. "The high current price GDP figure, which became known in the detailed GDP release, suggests that at the macroeconomic level, domestic companies were able to compensate for the deterioration in the replacement rate due to higher energy prices, which even allowed their profitability to improve," the Finance Ministry said.
• The special taxes and their increases also bring in extra revenue to the state coffers: mining tax revenues could rise by 35%, energy sector contributions could rise from HUF 203 billion to over HUF 716 billion, insurance tax receipts could be 29.7% higher than last year, airline contributions could rise by 131%, bank contributions could increase by 9.5%, financial transaction tax receipts could be 13.2% higher, and the tightening of retail tax could generate 16.1% higher special tax revenues for the full year.
• In nominal terms, the largest increase would be in consumption tax revenues, the government assumes. Here, the government expects an increase of HUF 1469 billion compared to last year, an increase of 16.9%, meaning that the government assumes that the increase in consumption tax revenues will be stronger than the rate of inflation.
• Within this, VAT receipts could increase by HUF 1 125 billion, or 16.4%. They are expected to approach HUF 8000 billion. In itself, this is the most significant item on the revenue side of the budget.
• Meanwhile, the government also expects excise duty revenues to rise by 19.1%, with the impact of tax rate increases already being felt.
• The population can also contribute more and more to the common treasury, at least on the payments side: this year, the population's payments may increase by 41% compared to last year's figures, with personal income tax revenues being the most important: the government expects a 45.8% increase, which means that these revenues will rise by HUF 1,274 billion to over HUF 4,000 billion. This is linked to the fact that the government also expects strong wage hikes in the Hungarian economy, which will further boost personal income tax revenues.
• The Cabinet expects an increase of HUF 851 billion in revenues from EU programmes.
• However, the projected increase in social contribution tax and contribution receipts is also quite impressive for the social security funds: 17.7% and 17.9% growth for the pension and health funds respectively.

Where, on the other hand, the government can make do with falling revenues:

• The consequences of the small business tax KATA change, seen in 2022, will really hit in 2023: the resulting revenue could fall from HUF 186 billion to HUF 82 billion.
• The revenue of budgetary bodies and headings may shrink by 33%.
• Among the special taxes, the government expects reductions in the telecommunications tax and the utilities tax.

Overall, in order to bring the cash deficit down from close to HUF 4,800 billion last year to HUF 3,400 billion, the government has increased revenue estimates by more than the increase in expenditure compared to 2022 (expenditure is HUF 4,125 billion higher in the central budget than last year, while revenue is HUF 5,163 billion higher in the 2023 plan than in 2022). All this suggests that the government is not only making savings in several items on the expenditure side, but is also making significant revenue savings, while ruthlessly collecting taxes from the companies concerned as well as from the public. The tax of the poor (inflation) will do its job again this year.

In this context, it is also worth recalling a point in the budget bill. The document prepared by the Ministry of Finance foresees that "the rules will be reviewed and tax rates will be adjusted for several specific taxes where they have not changed significantly for a long period of time. [...] Where possible, automatic indexation of the tax rate will be introduced in the future to ensure that the revenue from these items is not eroded in the future," the document reads. In other words, the government considers the inflation-tracking method important on the revenue side, but not on the expenditure side. This approach is certainly beneficial for the overall stability of the budget, but detrimental for the participants in the areas concerned on the expenditure side.

In the meantime, the government also benefits from the huge swelling GDP data to help bring down the budget deficit as a proportion of GDP. With real GDP expected to grow by 1.5%, the government expects a GDP deflator of 14.9%, meaning that Hungarian GDP will swell to HUF 77 973 billion.

Cover photo: Getty Images