A planned restructuring of Hungary’s tax system announced by the government in the middle of February will increase the country’s growth potential in the long term but will not improve growth prospects in the short run, National Bank of Hungary (MNB) experts said.
The planned tax shifts -- a reduction of payroll taxes and an increase of consumption-related taxes -- are steps in the right direction and will generate extra growth from 2011 on, Mihály András Kovács, deputy head of the MNB research staff, said when introducing the bank’s fresh Inflation Report.
The favorable effects will not be felt in the short run because of the dampening effect the planned government spending cuts and tax increases have on demand, he added.
The MNB forecast the country’s ESA95 general government deficit will drop to 2.9% of the GDP this year but grow to 3.3% next year, calculating with HUF 200 billion in spending cuts this year and HUF 330 billion in reduced expenditures next year, and taking into account only those tax cuts for 2010 which were sufficiently detailed by the government, MNB research director Ágnes Csermely said.
The 2010 deficit could fall to around 3% of GDP if all of the HUF 550 billion in spending cuts planned for 2010, as announced by the prime minister, materialize.
The MNB is expected to have losses equivalent to 0.2% of GDP in 2010 and 0.3% of GDP in 2011. The losses will be included in the budget deficits in the year after they are booked, or 2011 and 2012, respectively.
Planned cuts in state spending are the primary reason for a 0.5% GDP contraction projected for 2010 in the MNB’s fresh Inflation Report, Kovács said.
The MNB put 2010 GDP growth between 0.5% and 2.0% in its previous inflation forecast published in November. Hungary has entered the crisis with higher debt levels than most countries which make the proposed spending cuts inevitable, he noted.
The MNB projects GDP will contract 3.5% this year instead of a 0.2%-1.7% contraction forecast last November. The forecast carries a downward risk if the global recession and the credit squeeze turn out to be deeper and more sustained than thought.
The MNB staff expects GDP to contract in all major sectors this year. Industrial output is seen falling the most, by 10%. They expect growth to return on a quarter-on-quarter basis from the beginning of 2010, when an ongoing deterioration of companies’ profitability could come to a halt.
The announced government measures will add 1.1 percentage points to the inflation rate this year and raise 2010 inflation by 0.7-08 percentage point, Kovács said. The rate will rise only temporarily on the planned government measures, and if adjusted for the effect of the measures, it will stay below the 3% joint government-central bank mid-term target in both 2009 and 2010.
The MNB expects propensity to save to increase because of the recession and growing uncertainty, especially about job security. It sees net financial savings rising mainly due to a decline in bank lending.
An increase in retail saving is a major factor in an expected sharp drop in Hungary’s external financing requirement, to 2.1% of GDP this year and to 1.7% of GDP next year from 6.8% in 2008, calculated as the sum of the current and capital accounts.
Including net errors and omissions, the external financing requirement is seen falling from last year’s 9.5% of GDP to 5.0% this year and to 4.5% of GDP next year. (MTI-Eco)