ESA deficit could fall to 1.6% of GDP by 2020, says MNB

MNB

In its latest quarterly Inflation Report, the National Bank of Hungary (MNB) is predicting that in the most favorable scenario, the government deficit could fall to as low as 1.6% of GDP by 2020, based on the concept defined in the European System of Accounts (ESA). The gross public debt ratio, meanwhile, could drop to 66% by 2020. 

The ESA deficit may amount to 2.2-2.4% of GDP in 2018, while technical forecasts show it may drop to 1.8-2.0% in 2019, and 1.6-2.0% in 2020, the central bank was cited by state news agency MTI as saying.

Based on preliminary financial account data, the budget deficit was 1.9% of GDP in 2017.

As a result of tax cuts and the exhaustion of one-off revenues from preceding years (land sales, tax credit for growth), the deficit of the general government will increase temporarily in 2018, the MNB said.

Measures announced since the December Inflation Report - advance wage hikes in healthcare for emergency medical staff and nurses brought forward from November, one-off pension supplements, and winter-related utility cost reductions - amount to some 0.3% of GDP in expenditures. This, however, is offset by the rise in tax revenues resulting from favorable macroeconomic prospects, the central bank report continued.

Dynamically growing tax revenues from favorable macroeconomic developments and declining interest expenditures will contribute to the reduction in the deficit-to-GDP ratio following 2018, it added.

The forecast is significantly affected by uncertainty related to the disbursement and utilization of EU funds. Advance payments for 2017 and 2018 are expected to gradually decline until 2020. The real economic impact of the payments, and the actual utilization of funds, may be the highest in 2018 and 2019. This effect will stimulate the economy considerably, but through the increase in co-financing it will add to the budget deficit, the MNB noted.

According to preliminary data, at the end of 2017 the gross government debt ratio stood at 71.7% of GDP, down from 73.9% at the end of 2016.

Government debt including Eximbankʼs liabilities - which the MNB has included in state debt calculations from this year, in line with a decision by Eurostat, the EUʼs statistics office - amounted to a total 73.6% of GDP at the end of 2017, still down 2.4 percentage points from 2016.  Substantial economic growth, falling interest expenditures and a positive primary balance all supported the decline in government debt.  

Government debt may decline to 70.3% of GDP in 2018, said the MNB. As a result of growth and a moderate deficit, the debt ratio may decline by 1.4 percentage points this year and 2 percentage points annually in 2019 and 2020, coming close to 66% by the end of the forecast period, the central bank predicted.

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