According to European Union rules, the deficit-to-GDP ratio must be below 3 percent.Continue reading
The transparency of budgetary policy has markedly declined since the onset of the pandemic. This is evident from the absence of a newly adopted budget despite of a 4.5% deficit target, writes Világgazdaság in a recent analysis.
As a result, updated cash-based figures for revenues, expenditures, and specific line items are unavailable, posing challenges for thorough analysis.
Before delving into the evaluation of the first half of the year and unexpected developments, it is crucial to distinguish between the two primary indicators of the budget. The cash-flow indicator, crucial for financing, is reported monthly by the Ministry of Finance, reflecting the general government balance. In contrast, the ESA indicator, based on accrual accounting and expressed as a percentage of GDP, defines the deficit. This method records transactions at the time of ownership change, potentially leading to discrepancies known as the ESA bridge.
Despite these challenges, attempts have been made to estimate fiscal achievements based on monthly cash flow data.
Notably, one of the most significant unexpected developments in the first half of the year was the higher-than-anticipated direct tax revenues.
This surge was driven by robust labor market performance and wage increases, although it also contributed to service inflation concerns. Conversely, indirect taxes, particularly VAT receipts, fell short of expectations, suggesting lingering weaknesses in domestic demand despite improving trends elsewhere.
Turning to expenditures, a substantial amount, approximately HUF 2010B (EUR 5.1B), was disbursed for interest payments by June, primarily related to retail PMÁP (Premium Hungarian Government Security) payments. These payments are heavily concentrated, with 90% occurring in the first five months of the year. Looking forward, this line item is expected to see significantly lower expenditures in the second half of the year.
Regarding EU funds, pre-financing for projects continued, resulting in a gap of approximately HUF 367B (EUR 937.8M) between EU revenues and expenditures in the first half of the year, equivalent to nearly 0.5% of GDP. This gap is unlikely to narrow significantly in the latter half of the year.
Overall, the cash deficit totaled HUF 2,660B (EUR6.7B) in the first half, representing 67% of the full-year target.
While this places the general government in a better position compared to previous years, uncertainties remain regarding adjustments in accrual-based accounting. ING Bank projects a potential deficit slippage of up to 0.5% of GDP above the 4.5% target. This projection is partly mitigated by recent tax increases expected to generate approximately HUF 400B (EUR 1B) in revenue.
Looking ahead to the 2026 general election, there is a possibility that the government may consider fiscal stimuli if circumstances allow. Consequently, forecasts indicate that the 2024 deficit on an accrual basis could range between 4.5% to 5.0% of GDP. Meanwhile, the cash deficit may exceed this figure without posing significant financing risks at present.
Via Világgazdaság; Featured Image: Pixabay
