MNB: Government deficit in 2014 around 2.3-2.4% of GDP


In 2014, the deficit of the general government sector may have been around 2.3-2.4% of GDP, 0.1-0.2 percentage points lower than forecast in December, the National Bank of Hungary (MNB) said in its quarterly Inflation Report released yesterday.

Stronger than expected economic growth resulted in tax revenues exceeding the target by 0.1% of GDP at the end of the year. In the case of some primary expenditures of the central government, several items fell marginally short of expectations.

According to the forecast, the general government deficit may be 2.4% of GDP in 2015, assuming the complete cancellation of the available free reserves, the so-called Country Protection Fund, appearing in the budget bill.

The deficit forecast is unchanged from the December report, although the structure could change.

Despite scaling down this yearʼs annual average inflation forecast to zero from 0.9% forecast in December, the MNB staff raised its forecast for revenue from consumption-related taxes by 0.3% of GDP, as they expect the mandatory use of tills connected electronically to the tax office to raise revenues more than thought earlier. Revenues from these taxes are now expected to exceed the respective government target by 0.1% of GDP rather than falling behind the target.

The MNB cut the revenue forecast of payroll taxes by 0.1% of GDP, projecting higher employment but a smaller nominal wage rise than in December.

The MNB now expects EU transfers to rise this year from 2014 rather than drop as thought in December. Now they expect practically all of the funds available for 2007-2013 to be drawn. Also, accrual-based revenue from the EU was below their projection last year, which will raise revenue this year. Consequently, the MNB raised budget expenditures related to EU funding by 0.2% of GDP compared to December because of the increased co-funding needs. EU transfers are expected to drop next year more than thought.

The bigger utilisation of EU funds was a major factor behind the MNB raising its projection for this yearʼs investment growth, to 5.2% from just 1.8% forecast in December. Investments are now set to drop slightly more, by 1.2% instead of 1.0% next year.

Among other factors raising this yearʼs investment prospects is the extension of the MNBʼs Funding for Growth Scheme and the planned reduction of the bank levy, which could boost investments through improved lending activity.

The investment rate in 2015 is set to remain stable at over 20%.

Public sector investment activity may remain strong and rise further in 2015 with more EU funding drawn, followed by a downward shift in 2016 with the depletion of the EU funds provided under the 2007-2013 budget cycle. Although the MNB analysts expect investments funded from the governmentʼs own sources to rise more steeply than in the past years, this will not prevent public investment spending from dropping, to about 3.5% of GDP next year, after rising steadily since 2011, mainly thanks to growing EU-funded investments, close to 5% of GDP in 2015.

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