2013 budget bill targets 2.2% ESA deficit to GDP

The deficit target is the same as in Hungary's recently updated convergence plan, and is down from this year's respective target of 2.5% of GDP.

Hungary is seen to record a primary surplus of 2.0% of GDP next year. Accordingly, interest expenditure is expected at 4.2% of GDP.

The bill, published on Parliament's website, projects Maastricht-conform government debt to fall to 76.8% of GDP by the end of 2013. The debt ratio was 80.3% of GDP at the end of 2011 and dropped to 78.9% by the end of March 2012.

The cashflow-based general government deficit target is HUF 737.3 billion or 2.4% for 2013, as the central government is seen to record a deficit of HUF 677.3 billion or 2.2% of GDP, and local councils are projected to record a deficit of HUF 60 billion or 0.2% of GDP.

The bill targets total central government revenue of HUF 14,798 billion and total expenditures of HUF 15,478 billion. The central government includes the state social insurance funds and the separate state funds, and excludes local councils.

The bill calculated with a nominal GDP of HUF 30,885 billion for 2013 as against a projected HUF 29,188 billion for 2012.

The government submitted the bill well ahead of the September 30 deadline set by the law.

The government responded in the bill to several recommendations by the Fiscal Council contained in an opinion on the budget draft published on June 11.

The government noted that the Fiscal Council did not make any objections to the budget draft with regard to its credibility and its enforceability. It added that the cabinet continues to view as a priority task the start and successful close of negotiations with the International Monetary Fund and the European Union on precautionary financial assistance the country is seeking.

Responding to the Fiscal Council's assertion that the government's 1.6% GDP growth target for 2013 can only be achieved if domestic demand improves markedly and if investor confidences strengthens significantly, the government reiterated its commitment to reach an agreement on the financial safety net from the IMF and EU and said the resulting boost in investor confidence would have a positive effect on consumption. The government added that its projection for more or less unchanged household consumption in 2013, following a big decline expected in 2012, was not at all overly optimistic.

The Fiscal Council called attention to risk related to investments, noting unfavourable trends in the previous quarter. But the government pointed out that the low rate of investments is due mainly to low household investments, which do not contribute to potential GDP growth. More important are manufacturing sector investments, which were up 25% last year, it added.

The government repeated its commitment to encouraging a pickup in lending activity.

In spite of the differences over macroeconomic projections in the draft, the government accepted the Fiscal Council's recommendation to raise the amount in the National Protection Fund, a fiscal buffer, from HUF 50 billion to HUF 100 billion. The amount is sufficient to cover any shortfall resulting from GDP growth that is up to 0.9 percentage point under the projection, the government said in the bill.

The [usual HUF 100 billion] earmarked for extraordinary government measures in the bill can also be used to manage the risks stated by the Council.

The government said implicit reserves would result from a conservative projection for an average 80bp fall in yields in 2013 from this year, lowering the cost of debt servicing. An even bigger drop in yields could follow an agreement on the precautionary financial assistance from the IMF/EU and the end of an excessive deficit procedure by the European Commission launched against Hungary years ago.