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Hungary’s Budget Targets ʼSafe Growthʼ

Hungary’s finance minister has submitted the draft budget for 2019 to Parliament. The draft assumes an ambitious 4.1% GDP growth and a 1.8% deficit.

Minister of Finance Mihály Varga (left) submits the  bill on the 2019 budget to László Kövér, Speaker of Parliament, on June 13.

The “budget of secure growth” – as it has been dubbed by the government – was presented to Parliament for discussion on June 13. Minister of Finance Mihály Varga said that major changes cannot be expected in taxation, noting that the 15% tax on personal income will remain in place. The government earmarked HUF 101 billion more for healthcare than it did last year, while there will be HUF 15 bln more for education.  

One of the main characteristics of the 2019 budget is that it targets a 1.8% general government deficit, way below the 3% of GDP recommended by the EU. Next year’s budget is planned with increased reserves and a smaller deficit to provide a defense for possible crises on international markets, Prime Minister Viktor Orbán said in his regular weekly interview with public radio Kossuth Rádió last Friday.  

“Operationally this is a balanced budget,” Orbán explained. “Therefore if we ask how much the budget will allocate to the operation of the state and the country, then we can say that we are spending what we are producing, or earning. The deficit is all accounted for by future investments, and so investments create the deficit,” he said.

Umbrella Reserves

As for the reserves, he said: “It’s not yet raining, so a storm has not yet arrived – much less a hurricane. But there are clouds in the sky, and if these create an adverse formation, a crisis could result.” Continuing the metaphor, the increased budget reserves are an “umbrella”, he added.

The planned deficit is not only below the 3% cap, but well under the 2.4% target in the 2018 budget. The bill would also raise fiscal reserves by 50%. It also targets a reduction of the state debt ratio to 70.3%, from the 72.9% foreseen for the end of 2018. In addition, the government foresees the structural deficit at 1.7% of GDP next year, a drop from the 2.1% targeted for this year, but still over the 1.5% medium-term budgetary objective (MTO).  

The deficit goal set in the government’s draft 2019 budget bill, as well as the planned reduction of the state debt to GDP ratio, are achievable, the Fiscal Council commented in an opinion on the draft. The council warned, however, of risks to growth. The council emphasized that the budget draft is based on 4.1% economic growth in 2019, which exceeds analysts’ projections varying between 2.8% and 3.5% and can be achieved only if wages and employment grow at the projected high pace and household consumption rises as a consequence at the assumed high pace.

The draft budget targets a 3.8% rise in non-consolidated revenues of the central government subsystem next year, and a 1.8% rise in its expenditure. The draft bill also projects an annual 8.8% rise in the gross average wage, a 1.5% rise in employment, and a 3.9% real-term increase in household consumption.  

The council noted that the projected 9.5% rise in gross fixed assets accumulation or investments assumes a dynamic rise of lending and private sector investments, which are still significantly influenced by EU and Hungarian budget-funded developments.

International Risks

The council also warns of increasing international risks, saying that steps to improve competitiveness may support the achievement of the projected growth rate, but uncertainties in the international economic environment may add to risks.

If wages and domestic consumption grow more slowly than expected, tax revenue targets can be at risk, the council said, specifically mentioning the VAT revenue target. The draft bill proposes a 9.5% rise in revenues from consumption related taxes, up from the 2018 target, including a 11.6% rise in VAT revenues.  

As for inflation, the budget projects an annual average consumer price inflation of 2.7%, getting closer to the central bank’s 3% mid-term target.  

The council identified, in contrast, a positive risk in EU funding inflow as the draft assumes a relatively low inflow.

The council said it considers the planned size of the Country Protection Fund, set up to manage unforeseen risks, as necessary. The draft bill contains HUF 60 bln for the fund, and a further HUF 110 bln of reserves set aside for extraordinary government measures. A vote on the budget bill is scheduled for July 20.

OECD Raises GDP Projection for 2018

“Economic growth is projected to remain strong but to slow somewhat in 2019 as capacity constraints bite,” the OECD writes in its latest economic forecast. It says that private consumption will be boosted by real wage gains and employment increases, and investment will be stimulated by private firms and the disbursement of EU structural funds. The OECD projects that inflation will exceed the central bank’s 5% mid-term target in early 2019, as wage increases resulting from tighter labor market conditions will see CPI rise. With strong economic growth, a faster reduction of the budget deficit would allow the government to finance higher future age-related spending, the organization states. The OECD raised its GDP growth projection for Hungary, it now calculates with an increase of 4.4% in 2018 – which exceeds even the Hungarian government’s projection – and 3.6% for 2019, which is below the government’s forecast.

Numbers to Watch in the Coming Weeks

The Central Statistical Office (KSH) will publish data on the April performance of the Hungarian construction industry on June 15. January-April earnings will be released on June 21, followed by the second estimate of the April performance of the retail sector on June 22. The state of the Hungarian labor market will be in focus on June 28, and industrial producer prices will be released a day later.