Fiscal Council puts 2012 deficit under 3% threshold if most reserves not used up

Banking

Hungary can keep its general government deficit under the 3% of GDP threshold in 2012 if it does not use monies in the National Protection Fund and interest rate risk reserves, and if all measures to improve the fiscal balance in the Széll Kálmán Plan 2.0 are fully implemented, the Fiscal Council said on Thursday.

The independent body, established to issue opinions on state budgets, delivered the assessment after a review of fiscal processes in the first half of the year. The Fiscal Council established there was overspending on some items and significant shortfalls in revenue, mostly related to Hungary's macroeconomic path and an agreement with the Hungarian Banking Association.

The Fiscal Council noted increased risks surrounding the achievement of the 2.5% of GDP general government deficit target for 2012, but said that not spending the monies in the National Protection Fund and interest rate risk reserves would bring it down to 2.7%. It added that the European Commission's assessment in May that the 2.5% target was achievable, in light of measures taken thus far as well as planned steps, was favorable.

Achieving the deficit target will depend on whether the economy can be kept at least in a state of near stagnation, the Fiscal Council said. Local council debt could be less than the 0.5% of GDP target in the budget, but local councils may also have to spend their savings in the interest of accelerating European Union-funded developments, it added.

If the deficit remains under 3% of GDP, financing reserves remain untapped and exchange rates are steady, Hungary's state debt could fall 0.3-0.5% to around 80% of GDP, the Fiscal Council said.

The Fiscal Council projected significant shortfalls in revenue from the Simplified Business Tax and the bank levy. Much of the revenue from the corporate profit tax will come only in December and pro rata revenue from personal income tax clearly shows an undershoot, it added.

While the proportion of tax revenue from taxes levied on private individuals has fallen from 34% to 25% over the past two year, the proportion generated by taxes on consumption has risen from 53% to 61%, the Fiscal Council said.

The Fiscal Council said an agreement on precautionary financial assistance the government is seeking from the International Monetary Fund and the European Union could reduce Hungary's risk premium, adding that HUF 98 billion in interest rate risk reserves would be sufficient to cover the remaining interest rate risks if a deal is sealed.

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