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Country protection fund should remain unspent to keep deficit below 3%, Fiscal Council says

The Hungarian government should keep the HUF 170 billion Country Protection Fund unspent in the remainder of the year too to keep the fiscal deficit below 3% of GDP, the Fiscal Council said in an assessment of the fiscal and economic developments of the first nine months. The assessment was unanimously approved by the three members of the council: its president, the central bank governor and the head of the State Audit Office.

The Fiscal Council assesses budgetary developments in Hungary at least every six months. The scope of the current assessment does not include announced changes to the 2013 budget. The three-strong panel said there had been overspending in some areas of the 2012 budget and revenues had been significantly lower than planned.

Tensions remained on both sides of the budget despite steps to cut spending cut and revenue-raising measures taken in the course of the year, mainly due to worse than expected growth, the Fiscal Council said. Therefore, the government will need to hold back 170 billion set as budgetary reserves and fully implement balancing measures in the Széll Kálmán 2.0 plan to keep the deficit below 3% of GDP. This would provide for a decline in the debt-to GDP ratio, the Fiscal Council said. On top of these measures, the freezing HUF 133 billion in ministerial funds that have not yet been allocated as announced parallel with the country's Excessive Deficit Report (EDP) published on October 5, and keeping budget reserves unspent would allow for a budget deficit of 2.7% of GDP.

The council said higher pension payments resulting from a higher-than-expected inflation would probably cause overspending, as would the expected overshoot of the drug subsidies plan. Lack of clarity on the size and the planned resolution of municipal debt taken over by the government in May 2012, is also cause for concern. Larger interest rate payments were off-set, however by the higher interest received and higher interest risk reserves.

On the revenue side, the negative growth developments had affected tax receipts. Revenue from corporate income taxes was especially lower, the Fiscal Council said. There was a marked fallout in tax revenue from the banking sector as a result of the agreement between the government and banks that allowed banks to write off part of the losses they suffered on a preferential-rate early fx repayment scheme operated between late September 2011 and February this year as well as writeoffs related to other schemes helping households with foreign currency loans.

The council also expects some shortfall in revenue from payroll and personal income taxes as wages rose less than forecast. In all, the annual shortfall in tax revenues and social benefit contributions is expected to amount to 1% of GDP, the Fiscal Council said. Of the HUF 360 billion reserves in the 2012 budget, the government used HUF 52 billion of the HUF 100 billion designed for extraordinary government measures by the end of September. It spent HUF 99 billion or 110% of the full-year appropriation of the HUF 90 billion in risk reserves.

The HUF 170 billion Country Protection Fund remained intact until the end of September, in line with the limitation of the budget law, the council said, noting again that keeping the deficit under 3% of GDP requires keeping the whole fund unspent.