Economy 24 September 2024, 9:06am

"VAT wound" of Hungarian budget healing fast, but August gap still savage

Portfolio

A penny saved is a penny earned but it could also cost a fortune - this is one way of describing why Hungary's budget deficit in August this year jumped to unprecedented levels. What is striking is that "net VAT receipts" improved spectacularly in the previous month, but even that was not enough to turn the big picture of the budget around in any substantial way.

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Two weeks ago, Portfolio reported that Hungary's budget closed this August with a deficit of HUF 414.4 billion, the largest eight-month deficit ever. Over the past two weeks, analysts who have been closely following the budget process have been anxiously awaiting the Finance Ministry's (PM) detailed public finance report to reveal the main culprit behind August's dismal fiscal performance.

But those expecting big things will be disappointed:

there is no single big explanation for this huge August shortfall,

it is made up of many individual items. We highlight some of them based on the PM's detailed tables and interpretations:

The main point is that expenditures were 8.5% higher than in August a year earlier, at HUF 2,990 billion.
Within this, central budget expenditure was 7.4% higher at HUF 2,076 billion.
Expenditure on social security funds has also grown at an unusually high level: after HUF 767 billion in August last year, it has increased by 11% to HUF 852 billion this year. This includes the Pension Insurance Fund and the Health Insurance Fund, which both grew by 11%.
Within the Health Insurance Fund, we can see individual items that stand out. For example, cash benefits were 17% higher at HUF 95 billion. The curative-preventive fund increased by 8%, while drug benefits jumped by 14.3% to HUF 47 billion in the month of August alone.
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Other government expenditure increased to over HUF 52 billion from HUF 10.9 billion, and expenditure under the public investment chapter also rose to HUF 132.5 billion from HUF 90 billion in August last year.
Interestingly, interest expenditure was lower in August than this time last year.
Expenditure on budgetary bodies and headed appropriations also increased by HUF 103 billion compared to last year (11.6%), but the impact is smaller if we consider budgetary bodies and headed appropriations on a net basis, and add to this the development of their revenue in August.
Family and normative allowances would not have increased, but within this, maternity allowances increased by 18.6% to HUF 16.6 billion.
The road network availability fee is now 63% higher than in August last year (HUF 44 bn vs. 27 bn).
Also, the budgetary coverage of utility subsidies, i.e. the budget for the maintenance of the overheads reduction, was several times higher in August this year than last year: HUF 43.6 billion vs. HUF 6.4 billion.
It is also noteworthy that while last year the expenditure related to state property amounted to HUF -15 billion, this year the PM recorded an expenditure of HUF +13.5 billion on this line.
Meanwhile, revenues increased by only 7.4% compared to August last year, including central budget revenues by 6.4%.
Payments by business organisations increased to HUF 189 billion from HUF 162.5 billion in August last year.
There was a spectacular jump in road toll revenues to HUF 52 billion from HUF 32 billion.
There was a significant increase in the tax on pharmaceuticals, where in August last year there was hardly any payment, but this year the state received HUF 5.8 billion from this line.
Taxes linked to consumption amounted to HUF 642 billion, an outstanding increase of 28.1%.
Meanwhile, contributions from the population continued to grow steadily (9.5%) and dues at a rate above that.
Payments on state assets have also helped to ease the budgetary situation. Last year this line item was HUF -61 billion, this year it is HUF 23.5 billion plus.

The real game changer

The huge August budget deficit is particularly interesting in the light of the fact that one of the biggest imbalancing stories of last year is starting to recover at an accelerating pace. And that is the issue of VAT revenues.

The detailed data for August show that gross payments are both increasing and the amount of payments is decreasing, i.e. normalising after last year's spike. The combination of these led to

net VAT receipts in August this year being 38.7% higher than this time last year. VAT receipts of HUF 436 billion enriched the 2024 budget in net terms.