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Analyst: Soaring employment fuelled surprise budget surplus

Banking

Tightening employment and improving wages helped the government end the first quarter with a budget surplus, an unprecedented event in post-Communist era Hungary, according to analysts. The positive figure, announced earlier today, is apparently the result of declining expenditures and a simultaneous increase of revenues.

The government budget deficit – and surplus – as a percentage of GDP. (Source: Central Statistical Office)

The HUF 11 billion government surplus, equivalent to 0.1% of the GDP and reported today by the Central Statistical Office, can be attributed to an elevated amount of income taxes paid by businesses, according to Péter Virovácz, lead analyst of ING. He explained that this increase has a lot to do with a surge in demand for labor.

“The labor market has seen such an upswing recently that its impact is here to stay. Employment figures are breaking records and unemployment is also at a record low of 5.5%, and, at the same time, wages have been on the rise as well. This is what caused income-bound taxes to go up significantly,” Virovácz said.

In fact these figures are far rosier than anything the government dared to predict.

At first glance, the surplus of HUF 11 bln may not seem an awful lot, but considering that, in the past 4-5 years, the quarterly deficit was up to hundreds of billions, this is a very positive development, experts noted. The government managed to achieve this feat even while salaries in the public sector are up by 7%. Meanwhile, promises of even greater wage increases have been made for the staff of state-funded entities.

“The pressure is there, indeed, to raise wages even faster, but it can be kept under control. The main reason lies in the fact that EU funds have slowed down,” Virovácz explained. “That means less revenues, but it is also a relief for the budget, since this way the government doesn’t need to produce its own share in order to comply with the co-financing requirement of using EU funds.”

Should economic processes continue as they are now, the government will gain extra room to maneuver as it seeks to reach its deficit goal, set at 2% for 2016.

“As long as the labor market does so well and it provides the necessary tax revenues, I see no reason to worry about any risk that fiscal discipline gets disrupted, and the markets should feel the same,” Virovácz said.

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