It is imperative for Hungary to keep budget deficit below target this year - Fiscal Council

Portfolio's recent articles about the state of the budget:

The Fiscal Council, headed by President Gábor Horváth (pictured) and including State Audit Office (SAO) President László Windisch and central bank (MNB) Governor György Matolcsy, reviewed the main processes and background of the implementation of this year's budget law at its meeting on Thursday. The FC found that

• the domestic and European economic situation will continue to be negatively affected this year by the ongoing Russian-Ukrainian war, the generally tense geopolitical situation and the slowdown in European industrial production, with economic output expanding by 1.3% in the first half of 2024 compared to the first half of 2023,
• this year's real economic growth will be significantly below the 4% projected in the Budget Law and is forecast to be below 2%, with the largest shortfall in gross fixed capital formation compared to the forecast underlying the Budget Law, and the economy and especially investment will be adversely affected by the dragging out of negotiations on the disbursement of EU funds,
• this year's ESA-based deficit target, which was raised to 4.5% from 2.9%, was not transposed into the Budget Law, as was the case for the expenditure measures announced in April 2024 and the revenue measures adopted in July 2024, so the Budget Council could only assess the implementation of individual appropriations against the original revenue and expenditure appropriations, which did not reflect the higher deficit target,

• the risks indicated by the Fiscal Council in its opinion on the drafting of the 2024 budget have materialised, with the deficit of the central sub-system of general government amounting to HUF 2,656.4 billion in the first half of the year, 105.6% of the annual target set in the Budget Act. This is two-thirds of the general government cash deficit target of HUF 3,982 billion, increased in proportion to the revised ESA deficit. With a high cash deficit concentrated in the first half of the year, the accrual deficit in the first half of 2024 amounted to 3.9% of H1 GDP, according to the MNB's preliminary financial accounts,
• the higher-than-planned cash deficit was caused on the revenue side mainly by lower-than-projected VAT and excise tax receipts, and, for specific reasons, lower-than-projected payments by the energy sector. On the expenditure side, interest payments related to the financing of public debt, as well as higher-than-projected appropriations for budgetary bodies and professional headings, expenditure on public assets and payments related to pensions were higher than they should have been pro rata temporis;
• budget revenue from the European Union was nearly HUF 370 billion less than expenditure on EU programmes,
• the fiscal measures announced in April and early July 2024 support the achievement of the new deficit target, which will require consistent implementation of the measures and close monitoring and control of public expenditure as we approach the end of the year;
• the previously suspended EU rules re-entered into force in 2024, so, with a budget deficit above 3% of GDP both in the past and in the future, the Council of the European Union decided to open an excessive deficit procedure for Hungary in July 2024, following a proposal from the European Commission,

• the Fundamental Law [i.e. Constitution] provides for the reduction of the public debt ratio if it exceeds 50% [of GDP], but the special legal order introduced in scope of the state of danger allows for derogations from the debt rule this year as well. The Stability Law requires the government debt ratio to decline by at least 0.1 percentage point, while respecting EU rules on debt reduction, with exemption granted in case GDP contracts;
• the government debt-to-GDP ratio rose to 76.1% by the end of June this year from 73.5% at the end of 2023, due to a high cash deficit and the completion of a large part of the government debt issuance that financed the full-year deficit. The 3 percentage point reduction in debt planned in the Budget Law is significantly mitigated by a higher deficit and lower-than-planned nominal GDP growth due to lower real GDP growth. This year's debt reduction, which is lower than projected in the Budget Law, is also reflected in the government's EDP report projecting a 73.2% of GDP debt for the end of the year;

• the planned small decline in the government debt ratio makes it imperative to achieve a deficit below the revised accrual and cash deficit target and a subdued second-half debt issuance by central and non-central governments.
• The Fiscal Council also pointed out that the increasing foreign exchange ratio of public debt has also increased the exchange rate sensitivity of the debt.

Cover photo: MTI Photo/Szilárd Koszticsák