Economy 9 July 2024, 12:30pm

Hungarian gov't reveals specifics of major investment postponement

Portfolio

The Official Gazette published late on Monday reveals that the Hungarian government has lowered the spending side of this year's budget by HUF 369 billion. The government is cutting back mainly on investment, and has transferred the entire amount of the expenditure reduction into a reserve fund. Originally we interpreted this spending cut to be a new measure, while it turned out later that our wrong conclusion was caused by the overlapping of various announcements. This spending cut is merely the detailing of the postponement of HUF 625 billion worth of public investment projects, a fiscal adjustment measure announced in April. Traffic violations and breaches of tax regulations will also be a source for the cabinet to beef up budget revenues, as the fines will be raised drastically - they will be generally doubled.

The spending cuts are not part of the adjustment package

Numerous government decrees were published in the 160-page Official Gazette late on Monday.

In the table below we have collected how the fines for traffic violations and taxation-related breaches will change from 1 August. We have yet to see an official estimate as to how the general doubling of the penalties should affect budget revenues. We assume that the previous estimate of a HUF 400 bn revenue growth from the measures announced on Monday already contains at least a ballpark figure for this, though.

The 2nd annex to the decree lists peculiar rechannelling of funds, which is practically the suspension of certain spending items and another postponement of investment on top of the HUF 625 billion worth of projects that have already been temporarily shelved.

These items add up to HUF 369 billion and will be placed entirely into a reserve fund.

We initially wrongly assumed that this spending cut was most likely related to the fiscal adjustment measures announced on Monday. However, this is merely the detailing of the HUF 625 billion worth of investment projects to be put off, as announced in April.

What's in the expenditure postponement package?

The biggest losers from the spending cuts are individual investments. The Investment Fund, for example, was slashed by HUF 160 billion. The other items crossed out are the following:

Expenditure related to the assets entrusted to MNV Zrt. (National Asset Management). Investments in real estate, purchase of real estate and other assets: HUF -78 billion;
National Defence Fund: HUF -67.2 billion. This consists of three items (Development of Air Force Capabilities: HUF -9.2 billion, Development of Land Capabilities: HUF -17.8 billion, Other Development Expenditure: HUF -40.2 billion);
Ministry of Energy, Regional development tasks: HUF -20.3 billion;
Water utility development: HUF -10.7 billion;
Economy Ministry, Buda Health Centre Inc. (Budai Egészségközpont Zrt.) investment: HUF -6.8 bn;
Public railway developments: HUF -5 billion;
National Vaccine Factory and National Coronavirus Vaccine Factory: HUF -4 billion;
Public investments, Semmelweis University Institute of Pathology II, National Centre for Medical Innovation Training: HUF -3 billion;
Public investment, implementation of the New Knowledge Centre "Campus" in Kőszeg: HUF -2.7 billion;
Developments in Budapest: HUF -2.3 billion;
Economy Ministry, Innovation and development tasks in the automotive industry: HUF -2 billion;
Economy Ministry, Industrial development programmes: HUF -1 billion.

How big is the package then?

On Monday, there was a tsunami of announcements from the government, but they only highlighted the tax increase side of the story. Based on the detailed information, we have concluded that the tax hikes on banks will raise an extra HUF 92 billion in a worst-case scenario (for the budget) and HUF 222 billion in a best-case scenario for the state this year. And with the extra tax burden on energy companies, the budget will collect between HUF 167 billion and 297 billion in extra revenue.

Given that the spending cuts DO NOT COUNT AS NEW MEASURES, our conclusion that they should be added to the new revenue-boosting measures (i.e. tax hikes) was wrong. The situation remains unchanged, i.e. the HUF 400 billion correction is the official impact, but the specifics published up to this point do not add up to an adjustment of that size.