bne IntelliNews – ING: Hungary’s budget deficit breaks new record
Hungary’s monthly deficit in November broke an all-time high with a deficit of over HUF 1,000 billion. It just shows the strength of the current fiscal push.
After seeing November inflation hit a record high not seen since late 2007, we didn’t have to wait long for another record to be broken. This time it is the Hungarian budget, which posted a monthly deficit of HUF 1,009 billion based on cash flow in November. With this, the budget deficit since the start of the year stands at HUF 3.931 billion, or 98% of the modified deficit plan for the entire year.
In this context, there is not much room for maneuver (only 92.7 billion HUF) for the government to meet the deficit target in December. The average monthly deficit over the past six months was around HUF 440 billion and, after checking the December monthly deficits, the historical average stands at HUF 220 billion. Given all of this, it is difficult to think how the government will be able to meet even the amended cash deficit target for the entire year.
What is important to note here is that the Government Debt Management Agency is well ahead of its issuance plan, which means that if the government does not want to comply, it has the necessary financial leeway to do so. Moreover, since this target refers to the deficit based on cash flow and not the Maastricht criteria, the meaning of not meeting this target is less important from a political point of view.
The only binding rule – the European Commission having temporarily suspended its fiscal rules – is the national fiscal rule. According to our calculations, due to the strong growth in nominal GDP, the debt rule is not threatened, so the debt-to-GDP ratio will fall even if the government does not meet its own deficit target.
With the budget burdened with one-off expenses, such as retirement bonuses and retirees’ allowances due to high inflation (these stand at HUF 250 billion), we expect a much better deficit figure in December. . But what is more important here is that in the fourth quarter of 2021 and the first quarter of 2022, the government has spent and will spend HUF 4.8 billion to support the economy. This contains retirement bonuses, one-off bonuses for the armed forces, a tax refund for families, the reduction in the personal income tax for those under 25 and also a reduction of 4ppt in the tax on salaries. , without forgetting the many investments financed by the State.
All of these measures will push up aggregate demand in the Hungarian economy which suffers from supply shortages in several areas (spare parts, labor, etc.). This will only add to the inflation pressure which has already reached its highest level in 14 years. In our view, fiscal consolidation should start as soon as possible and should be completed quickly to mitigate the risk of high inflation over the medium term. We only see this happening in the second half of 2022 at the earliest, as Hungary faces general elections in the spring of next year.
Pierre Virovacz is senior economist for Hungary at ING. This note first appeared on ING THOUGHT portal here.
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