Fiscal Council sees deficit, debt goals in 2017 budget as achievable, with some risk

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The deficit and debt goals set in the governmentʼs 2017 budget draft are achievable, with some risks, the Fiscal Council said in an opinion published yesterday, according to Hungarian news agency MTI.

The draft targets an ESA 2010 general government deficit of 2.4% of GDP for 2017, and – at an unchanged exchange rate – a drop of year-end government debt to 71.9% of GDP in 2017 from an expected 74.3% in 2016 and from a yet-to-be-finalized 75.3% at the end of 2015.  

The government plans to submit the budget bill to lawmakers on April 26.

The draft budget is based on 3.1% growth for 2017 which is realistic, taking into account 2016 growth of about 2.5%, the expected growing utilization of EU funds and rising consumption, the council said.

It noted, however, that while revenue and spending projections are basically in line with the macroeconomic projection, the targeted 5.4% increase of VAT and the planned 7.8% increase of personal income tax revenue are ambitious and could require further improvements of tax collection.

The under-1% inflation on which the budget was calculated is below the average forecasts available for the council.

Spending items could be kept at the target even with somewhat higher inflation, the council believes, with the exception of pension expenditure.

It is important to keep the rise in spending on wages in line with tight fiscal limits and performance, the council warned.

The budget projects a dynamic increase of investment.

The accelerated drawdown of EU funding increases the deficit through the domestic co-funding, the council noted. Central budget expenditure related to EU-funded programs is set to rise from HUF 1.432 trillion this year to HUF 2.239 tln according to the draft. Net cashflow based spending of the central budget related to EU funding could be nearly HUF 700 bln in 2017.

Interest expenditure is expected to drop to 5.5% of GDP.

The fact that the deficit ratio is set to rise from an upward revised 2% last year and 2% targeted for this year implies a rise in the structural deficit, which excludes cyclical factors and one-offs. This, however, cannot be the base for an excessive deficit procedure, the council said, still seeing the need for the government to explain that the deficit goal is in line with EU rules in the bill.

The budget bill should keep in mind the medium-term fiscal objective when setting the size and the within-year utilization of the Country Protection Fund, and the government should explain the type and volume of risks it took into account when planning the budget reserves, the Council said.

The budget draft includes HUF 120 billion in general reserves and another HUF 50 bln in the Country Protection Fund, set aside for unforeseen risks, the councilʼs statement revealed. Individual budget chapters must set aside their own stability buffer, similar to 2016, as well. 

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