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Fiscal deficit to exceed 3% in 2012, but drop later if gov’t plan fully implemented

Hungary's general government deficit will exceed 3% of GDP in 2012, but the deficit could realistically drop to below 3% of GDP on the medium term if the government deficit-reducing plans contained in its Széll Kálmán plan are fully implemented, the National Bank of Hungary (MNB) said in its fresh Inflation Report.

The MNB forecast a general government surplus, calculated using EU methodology, of 2.5% of GDP in 2011 as a result of the transfer of private pension fund assets. Excluding these one-off revenues, however, Hungary would have a deficit of 4%-5% of GDP both in 2011 and 2012, the central bank staff said in the report.

The Széll Kálmán plan projects Hungary's fiscal deficit will drop from this year's budget target of 2.9% of GDP to 2.5% in 2012, 2.2% in 2013 and 1.9% in 2014.

The MNB Inflation Report estimated the deficit reached 4.4% of GDP in 2010, well over the government's 3.8% target, but it gave a positive assessment of the structural (or midterm) position. However, the position will significantly deteriorate this year as a result of tax reductions -- both to the personal income tax and corporate tax -- and the payment of real yields on assets of private pension fund members returning to the state pension pillar, according to the report. The structural position will improve only slightly in 2012 under the staff's base scenario, which, in line with the MNB methodology, could take into account only a few of the measures announced in the Széll Kálmán plan because the details of many steps were insufficient to allow a full assessment of outcome.

The MNB staff calculated as a technical assumption, because of the lack of details, that only about half of the HUF 550 billion of fiscal improvement in 2012 outlined in the plan would be realised, MNB analyst Barnabás Virág said after the report was published.

Under the base scenario, the general government deficit is set to rise again, to 4.6% of GDP, in 2012.

The 2012 deficit could drop to 3.6% of GDP, if the 1.8 percentage-point gross deficit reduction projected by the Széll Kálmán plan -- which translates as a one-percentage-point net reduction -- is fully realized, the MNB calculated in an alternative scenario. The deficit ratio will still well exceed the respective 2.5% government target, but could realistically drop under 3% if the plan is fully implemented, the report said.

The report said that HUF 250 billion in reserves set aside by the government from the 2011 budget could improve the budget position by 0.5%-0.6% of GDP if the reserves remain untouched. With no lasting steps, however, the freeze will not improve the balance in 2012, the bank's staff noted.