UPDATE - Hungary deficit could reach 3.1% in 2012 - MNB

Hungary's ESA general government deficit could reach 3.1% of GDP in 2012, the National Bank of Hungary said on Tuesday, citing an analysis of the 2012 budget bill prepared by the central bank's staff.

The government targets a 2.5% deficit in 2012.

The MNB said the deficit target could be achieved if the government does not spend the bulk of reserves in the budget bill, amounting to 0.7% of GDP, and implements, in full, all measures contained in the bill.

Not spending the reserves, however, would considerably narrow the government's room for maneuver, leaving it without means to counter-balance possible unfavorable effects next year, the MNB said.

The MNB said the difference between its deficit projection and the government target was in large part due to the estimated effect of government measures on narrowing the gap. The central bank attributed a smaller part of the discrepancy to differing macroeconomic projections and a lack of details that makes the effect of fiscal measures difficult to calculate.

The MNB's projection for economic growth is more pessimistic than the one in the budget bill, in part because of the effects of fiscal measures, the central bank said. However, the difference between the two macro-economic projections affects the deficit only slightly, it added.

The slow increase of consumption and investments and the unfavorable effect of low profits on corporate tax revenue will be offset by more revenue from payroll taxes as a big minimum wage increase lifts inflation and raises wages overall, the MNB explained.

The MNB believes the local councils' deficit will be two-tenths of a percentage point of GDP lower than the projection in the budget bill.

The budget bill projects a 0.5% of GDP deficit for local councils.

The MNB expects about HUF 250bn in reserves in the 2012 budget to be used to manage fiscal tension as well as for wage compensation for Hungarians who are worse off because of personal income tax changes. The remaining HUF 200bn of reserves could be enough to bring the general government deficit down to 2.5% of GDP, it added.

The MNB noted that the budget bill is not in line with the law on fiscal responsibility in terms of content or form.

The MNB will publish the analysis in full on Thursday.