Economy 3 January 2024, 10:05am

Recent data show a huge budget deficit in the government sector

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In October, the government raised its full-year deficit target to 5.2%, but according to data just released by the Hungarian Central Statistical Office (KSH), the central budget was already 5.4% short in the third quarter ending in September. The special taxes might have made a big difference to production tax revenues. A major question is whether the government's deficit estimate of 5.9% for 2023 as a whole is sustainable, and whether the deficit as a proportion of GDP has risen above 6%.

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The preliminary data detailing the economic situation in the third quarter of 2023 show that the deficit of the government sector as a share of GDP was 3.7%, which is HUF 264 billion, 2 percentage points better than in the same period of the previous year, according to the latest quarterly report of the KSH on the balance of the government sector.

At the same time, the aggregate deficit for the first three quarters was 5.4%, which was HUF 1,363 billion worse than a year earlier and 2.1 percentage points worse in GDP terms.

In the third quarter, government sector revenues grew by HUF 861 billion, or 12.7%, while expenditure increased by HUF 597 billion, or 7.7%. While the deficit was HUF 701 billion, or 3.7% of GDP, the balance improved by HUF 264 billion, or 2 percentage points, compared to a year earlier.

The revenue of the general government sector was HUF 23,027 billion, the expenditure amounted to HUF 26,024 billion.

It is important to note that the government's macroeconomic forecast, issued in the last days of the year, already showed that the cabinet missed the deficit target raised in October to 5.2%, but for 2023 as a whole, the deficit was forecast to be only 5.9% of GDP. However, questions remain as to how tax revenues developed in the fourth quarter, when the deficit was already 5.4% by the end of the third quarter. The main drag on the balance last year was from lower-than-planned VAT receipts, which may have been an improvement due to seasonal effects over Christmas, but it may well be that the 5.9% estimate was too conservative for the cabinet.

The fact that the central budget accumulated a deficit of HUF 586.7 billion in November alone does not paint a positive picture, which is particularly alarming given that the November balance was already improved by an extra HUF 309 billion payment from Hungarian Electricity Works (MVM). So, all in all, a good December may have been the key to keeping the full-year deficit at 6%. Moreover, the fact that the first EU transfers from the RePowerEU chapter arrived in the last days of 2023 does not really help to make this more attractive, as this EUR 300 billion item does not affect the cash-flow ESA deficit.

The balance of the government sector deteriorated by HUF 1,363 billion, or by 2.1 percentage points in proportion of GDP compared to the same period of the previous year.

Revenues increased by HUF 2467 billion, or 12%, compared to the previous year. Most of this came from production tax revenues, which increased by HUF 1107 billion, or 12.8%. According to the report, the increase was mainly due to higher revenues from special taxes and local business tax.

Revenues from taxes on income surpassed by HUF 647 billion (19.4%) the previous year’s level. Social contributions increased by HUF 697 billion (by 14.8%). The change in other revenues is only marginal, these went up by HUF 18 billion (0.5%).

Expenditure increased by HUF 3 829 billion, or 17.3%, compared to the previous year. Compensation of employees increased by HUF 231 billion, or 4.6%, while social benefits in cash rose by HUF 1,000 billion, or 19.9%. Within this, payments for retirement benefits increased by HUF 784 billion, or 22.3%.

Intermediate consumption went up by HUF 516 billion (by 13.7%) and interest expenditures doubled, reaching HUF 2,469 billion.

The most painful item, however, is that interest expenditure doubled to HUF 2 469 billion.

Gross fixed capital formation decreased by HUF 190 billion (by 8.4%). Other general government sector expenditures went up by HUF 1,044 billion (by 21.4%).

Based on these data, the third quarter shows a more favourable outcome in terms of the deficit-to-GDP ratio, but the first three quarters of the year have seen an overall less favourable economic situation in the government sector, as reflected in the increase in revenues and expenditure, as well as the increase in the deficit, and in fact, the budget's ability to deliver the estimated deficit below 6% may depend on a single month of positive data.

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