Hungarian overheads reduction programme reaches its target with astronomical costs

The maintenance of the revised system of overheads cuts, coupled with falling interest expenditure due to the rising domestic yield environment, is draining fiscal resources away from virtually all other objectives, in other words squeezing the budget to the bone, according to detailed second-month cash-flow budget figures published recently by the Ministry of Finance.

Two weeks ago, Portfolio reported that the budget deficit in February was unusually high: the average deficit over the past 21 years is HUF 334 billion, while the latest deficit was more than 4 times that amount. In the absence of detailed data, we were only speculating about the reasons for this. In light of recent figures, we can say that our assumptions have been confirmed.

Overheads cuts are expensive fun

It is worth starting our analysis on the expenditure side. In a single month, the budget - excluding local governments - spent HUF 3,903 billion on various purposes, 13.5% more than in February 2022 (HUF 460 billion more).

The most striking increase on the expenditure side can be seen in the specific and normative grants: after HUF 15 billion last year, HUF 468 billion was spent on this in February this year. The information material of the Ministry of Finance details that HUF 563.9 billion was spent in two months on the protection of public utility bills, which means that

in February alone, HUF 390 billion was spent to maintain the modified system of public utility bills.

(In January, the government spent HUF 173 billion on this purpose.) But also related to the reduction in overheads is the expenditure on compensation for district heating suppliers, which amounted to nearly HUF 50 billion in February. All in all, in the second month of the year, the state spent nearly HUF 450 billion just to finance the cuts. To put it another way, one could say that

every sixth forint allocated from the central budget was related to the cuts.

There was also a significant jump in interest expenditure, with over HUF 193 billion spent on interest in February this year, up from HUF 75 billion in February last year. In this context, the longer the period of extremely high interest rates lasts, the longer the budget will have to carry the current burden, as government bonds are gradually repriced. In other words, we can slowly prepare for years with little or no room for budgetary manoeuvre.

On a different note, but also related to the increase in the cost of funding, expenditure on start-of-life allowances within family allowances increased significantly: in 2 months, spending on such allowances amounted to HUF 11.7 billion, up from HUF 0.8 billion last year. This was linked to higher interest expenditure on baby bonds (the interest rate paid was now 14.6%, compared to 5.2% in 2022).

The state spent significantly more on pensions in February, with HUF 851 billion going out of the budget in pension benefits, 23% more than last year. This is due to the increased payment of the 13th month pension. Meanwhile, Health Insurance Fund expenditure increased by 9.1% overall, below the rate of inflation, from HUF 324 billion to HUF 354 billion.

The doubling of home subsidies to HUF 82 billion is barely noticeable in light of the above amounts, and this is linked to the rush to pay out the home renovation subsidy, which ended at the end of last year.

Revenues delivered the commitment

Revenues totalled HUF 2,522 billion in February this year, an impressive 36% increase at first glance. Still, it should be noted that more than HUF 600 billion in personal income tax refunds were paid out of the budget last February. This means that if last year's personal income tax refund does not materialise in February, the budget revenues will be close to HUF 2,500 billion in February 2022. So in this respect, budget revenues have stagnated this year on a year/year basis, which is not very promising in many respects:

• inflation is at a high level, which should automatically boost sales-type revenues spectacularly, supporting the revenue side of the budget, and
• extra profit taxes generate extra revenues.

In other words, without the extra revenue from inflation and the higher special taxes, the budget would be in deep trouble. This is reflected in the concrete figures: payments by economic operators totalled HUF 228 billion, 50% more than this time last year.

The amount of VAT receipts in February is very interesting: after collecting HUF 213 billion last February, this year HUF 175 billion last month, while the annual inflation rate was 25.4% in the second month of 2023.

Personal income tax revenues amounted to HUF 294 billion, compared to HUF -325 billion last year. Adjusting last year's figure for last February's outstanding HUF 620 billion PIT refund, we can therefore say that PIT revenues this February were flat compared to a year ago. This is not necessarily good for the fundamentals of the budget, and it is possible that the recession has already had an impact on state coffers. However, the fact that contributions have risen compared to February last year, contributing to the balance of the social security funds, somewhat dampens the worried voices.

As regards the outlook for this year's budget, it will be interesting to see to what extent the stubbornly high interest rates will override the government's interest expenditure plans and whether the spending relating to reduced overheads can be contained as planned.

Indeed, it is clear that the contraction in retail sales, the slowdown in investment momentum, the weakness in domestic consumption, i.e. the recessionary Hungarian economic environment, is already leaving a negative imprint on fiscal processes.

After only two months, there is no need to sound the alarm bells, but one of the most interesting questions now is how long this economic slowdown will last, which could also determine the state of the budget. True, the investment freeze, which is reining in public spending month by month compared with previous years, may help, and the government can be confident that if contributions rise, this will be accompanied by a later rise in personal income tax revenues.

It will also be interesting to see how the EU funds issue develops, but this is now surrounded by such political risks that it is very difficult to predict the impact (either positive or negative). From a cash-flow perspective, this could even cause a slippage if EU funds fail to be transferred (or only partly due to lack of agreement), while the state continues to pre-finance projects that should be co-financed by the EU.

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