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Govt needs to step up budget measures in 2012 - MNB

Hungary’s general government balance may turn out better this year than earlier envisaged but budget balance in 2012 needs to be improved by 2.9% to meet the target – quite a challenge even in light of the measures outlined in the Széll Kálmán Plan and the Convergence Program, the central bank (MNB) said

Hungary's National Bank (MNB) has published a new study that aims to provide information on how budget processes will turn out this year and next, reports The new analysis may be a point of reference for the Fiscal Council for the assessment of the 2012 budget plan, as the central bank has become one of the professional workshops supporting the FC, given that MNB Governor András Simor is one of the FC’s members.

According to Simor the MNB intends to publish four studies as part of this new series annually.

MNB staff projects this year’s cash flow-based general government deficit to reach 6.4% of gross domestic product, exceeding HUF 1,800 billion. Meanwhile, the accrual-based (ESA-95) balance will show – thanks to the transfer of private pension fund assets to the state – a surplus of 2.8% of GDP.

The MNB projects that the gap of the central state budget will overshoot the target by HUF 17 billion, as tax revenues will fall short of the projection. At extra-budgetary funds the MNB staff expects a HUF 13 billion larger surplus than the target, while they see a HUF 78 billion MNB gap at social security funds, as the combined result of higher-than-expected contributions on the revenue side and savings to be achieved on pensions and cash benefits in healthcare. Therefore the MNB study shows the government’s deficit target could be reached easily this year.

2012 will be a much tougher year for the government if it wants to reach the budget deficit target. In order to do so it would need to improve the balance by as much as 2.9% of GDP. The measures detailed in the Széll Kálmán Plan and the Convergence Program could contribute to this improvement.

Hungary's Fidesz-led government pledged HUF 550 billion gross savings in the Széll Kálmán Plan, which could be even bigger thanks to measures outlined in the Convergence Program. So, in order to reach the deficit goal the stability reserve should be incorporated into the 2012 budget, i.e. the cabinet would need to actually reduce spending.

A sustainable incorporation of the savings achieved by the stability reserve could improve the 2012 balance by 0.6% of GDP, the MNB staff estimates. This is based on the assumption that the canceling of the stability reserve is backed by durable spending cuts that will bring additional balance improvement compared to the Széll Kálmán Plan and the Convergence Program.