Hungary may phase out some taxes - Finance Minister
Finance Minister Mihály Varga gave a presentation on the prospects and challenges of the Hungarian economy at the Portfolio Budapest Economic Forum conference. In addition to the state of the Hungarian economy, the presentation, , entitled "Under a cloudy sky", is also timely given that the government has just this week decided on a 21-point action plan to boost economic growth.
Highlights of Varga's presentation:
Reflecting on Mol Chairman-CEO Zsolt Hernádi's presentation, the Finance Minister said he hopes that Draghi's competitiveness report will not end up like most EU reports.
Since 2010, the potential growth of the Hungarian economy has weakened, but this was mainly due to the coronavirus pandemic and the Russian-Ukrainian war. However, in recent years the Hungarian economy has been performing increasingly close to its growth potential. This could be achieved by 2025.
Potential GDP (excluding one-off effects) in Hungary is around 3%, higher than in the region. In Germany it is only around 1%.
A way to improve competitiveness and efficiency: this is why the government has set up the 6-year wage agreement 2017-2022. Real wages have risen by 45% and contributions have fallen by 15.5%.
Improving the primary budget balance is a prerequisite for economic development. Next year, interest expenditure in the budget should improve strongly. Reducing the budget deficit remains important. Hungary is among the EU leaders in deficit reduction between 2021 and 2025. Household savings will become more valuable in financing the deficit.
According to the Finance Minister, the optimal mix of debt financing is 50% institutional investors, 25% retail and 25% foreign exchange.
On the issue of public debt, Mihály Varga said that public debt has risen to close to 80% due to the pandemic, but will fall to around 73% by 2024.
The income position of the population is improving, but there is still a cautionary motive. The rebuilding of reserves lost in previous years is underway, but this is not a Hungarian speciality, it is a struggle across the EU. The rise in savings reduces the country's vulnerability. This could be the basis for the development of the Hungarian economy in the coming years.
Mihály Varga has called for a European solution for foreign, mainly Asian, online shops. They are costing a lot for the state budget, he said.
Last Friday, the European Commission sent a request for information (RFI) to Chinese online marketplace Temu under the Digital Services Act (DSA), requesting the platform to provide detailed information and internal documents on the mitigation measures taken against the presence and reappearance of traders selling illegal products on its online marketplace. Temu must provide the requested information by 21 October.
Based on the assessment of Temu's replies, the Commission will determine the next steps. This could entail the formal opening of proceedings, the Commission can impose fines for incorrect, incomplete, or misleading information in response to an RFI. In case of failure to reply, the Commission may issue a formal request by decision. In this case, failure to reply by the deadline could lead to the imposition of periodic penalty payments.
The outlook for the real estate market is promising. Real estate transaction numbers are already improving and interest rates are on a downward trend, said Varga.
Financial conditions have already normalised and retail government bond yields may fall, but this will require a favourable inflation and interest rate environment. The current 3% inflation is not enough, inflation in the coming months will also be important for setting government security yields.
The German economy is still in recession, with the IFO economic sentiment index showing a further deterioration in business prospects, as confirmed by ZEW surveys. Austria has not experienced a recession like the one it battling now since 1946.
Meanwhile, there are problems in China, but monetary and fiscal stimulus has already started. The government hopes that China's structural problems can be alleviated. The consensus of analysts in a Reuters poll shows 4.8% growth for this year. However, China's public debt has risen to 89% of GDP by now from 40% in 2014.
The introduction of additional tariffs on Chinese electric vehicles will not help the European automotive sector. What can the Hungarian car industry do in this difficult situation? It has to adapt and Asian partners will increasingly dominate, especially if Germany lags behind technologically.
On domestic macroeconomic developments, the Finance Minister said that GDP growth in 2025 could be 3.4%, consumption could expand by 4.3% and investment by 5.0-5.5%. A reduction in interest expenditure will help and the business environment will also improve. The government expects wage growth of 8.4% next year.
No new taxes are planned, and some taxes may be phased out.
The indebtedness of the domestic private sector is also very favourable by EU standards. The combined public and private sector debt is the country's manoeuvring room. This is very low by EU standards and could be a driver of economic growth next year.
The government still has work to do on the budget deficit. it wants to reduce the public expenditure ratio from close to 50% to around 45%.
To sum up, the outlook for the Hungarian economy is for 3-6% economic growth next year, as consumption is expected to pick up and the cautionary motive should ease.
In addition, major investments will be launched (BMW car factory, Budapest-Belgrade railway project to be completed, Paks 2 to continue, BYD plant to be completed). On the government side, the lower deficit will support growth, and targeted economic programmes and human capital development will also help.
Cover photo: Portfolio
