Economy 1 October 2024, 11:40am

Hungarian gov't raises deficit estimate on the low-low

Portfolio

The Hungarian government has substantially raised its 2024 cash flow budget deficit estimate in its Excessive Deficit Procedure (EDP) Report submitted to Eurostat, the EU's statistical office. The target calculated on the basis of EU methodology (ESA gap) remains 4.5% of GDP, though.

Higher cash flow-based deficit

The Central Statistical Office (KSH) has published the EDP report that Hungary is required to report to Eurostat under the Excessive Deficit Procedure (EDP) legislation, in accordance with the methodological requirements based on the ESA 2010 system of national accounts. The most interesting data in this is the balance the government expects for the year 2024.

The EDP report published by the on Tuesday shows that the government expects a cash deficit of HUF 4,790 billion for 2024 (central subsystem, excluding local governments), compared to HUF 3,981 billion in the spring and HUF 2,514 billion in the original forecast (in the 2024 Budget Act adopted last summer).

It is important to note that the cabinet continues to expect the ESA deficit, calculated according to the EU methodology, to come in at 4.5% of GDP, i.e. the official deficit target has not been raised. Read more about this below!

The new deficit pencilled in for this year is 90% (!) higher than the one in the Budget Act adopted last summer and markedly (20%) higher than the deficit in the EDP report submitted to Eurostat in the spring.

The detailed table does not give a concrete explanation of the exact reason for the further raise to the deficit planned for this year.

We do know that the much worse than planned macroeconomic developments have left a deep scar on the budget. These are:

real economic growth of around 1.5-2.0% this year instead of the planned 4% plus growth;
extremely poor consumption and investment performance;
massive interest expenditure (HUF 3,956 billion in ESA terms);
blocked EU funds;
the financing of the renationalisation of Budapest Airport.

The latter item is the only one that affects the cash deficit and leaves the ESA balance intact.

How come the 4.5% of GDP target remains?

The detailed table reveals that the 4.5% of GDP ESA deficit target for 2024 remains unchanged. But how?

Well, the cabinet expects this shortfall at HUF 3,705 billion (HUF 3,515 bn gap at the central government, HUF 24 bn deficit at local governments and HUF 166 bn shortfall at social security funds), which equals 4.5% of the HUF 81,668 billion GDP estimated for this year.

It is therefore clear that there is a huge gap between the cash deficit and the deficit calculated according to the ESA methodology, the so-called ESA bridge. However, the current report does not explain why the ESA bridge (this kind of 'extra' deficit) has become so high (almost HUF 1,090 billion, compared to HUF 332 billion reported in the spring).

At first sight, there are two obvious reasons behind the contradictory changes in the two types of deficit indicators. The first is the airport acquisition, which is a budgetary expenditure on a cash basis, but since it is an acquisition of assets, it is not charged to the general government balance on an accrual basis.

The second is developments in EU funding. In the spring, the government probably expected the transfer of larger EU funds, but as EU funds have not been unblocked, the transfers are made slower than expected. As long as EU funds are not lost for good, only suspended, the situation does not hurt the ESA balance indicator, but it does hurt the cash flow balance.

State getting indebted more and more and this comes at a price

But the fact is that the Hungarian state has had to finance the increased cash deficit this year, i.e. to raise HUF 809 billion more than in the spring, which presumably did not cause the government any problems (the funding and resources were available), and the state's financing is not going to go awry, but this costs a pretty penny.

It is reflected in extremely high interest payments, high refinancing needs (and all the risks that entails), and the debt trajectory we are witnessing right now.

Just as a point of interest, last summer the government projected the ESA deficit (4.5% deficit and GDP of HUF 85,255 billion) to be somewhere around HUF 3,836 billion in nominal terms.

This has now become HUF 3,705 billion according to ESA methodology. This means that, according to the EU methodology, the underlying budget balance is better than last summer, while real economic developments are significantly worse than the government planned last summer and the cash deficit has ballooned compared to what was adopted in the summer of 2023.