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GKI says gov't tax and economic measures make 2011 deficit of under 3% of GDP possible

Economic research company GKI said that the government's tax and economic measures announced so far will enable Hungary to keep its budget deficit under 3% in 2011, though could hamper economic growth both over the short and the long term, GKI reported on Friday in an analysis prepared jointly with Erste Bank.

The analysis was prepared before the government submitted the 2011 budget bill to Parliament on Saturday. The bill targets a general government deficit of 2.9% of GDP in 2011.

The analysis warned that if Hungary's Constitutional Court or the European Union invalidate any of the government's measures, this may prevent Hungary from keeping its deficit under 3% of GDP next year.

The GKI-Erste analysis predicted that Hungary's GDP would grow by 2.5% in 2011, though domestic consumption would only rise by 1%, at most, next year. The projection is below the government's 3% GDP growth forecast for 2011.

The researchers noted that the rise in revenue and fall in expenditures stemming from the government's three-year extraordinary tax on companies operating in Hungary's energy, telecommunications and retail sectors and a 14-month suspension of private pension-fund payments amount to more than 2.5% of GDP. The impact on the central budget stemming from the government's introduction of a 16% flat tax next year and increase in tax preferences for families with children amounts to 2% of GDP, the analysis added.

The GKI-Erste analysis predicted that Hungary's net foreign debt could decline to EUR 46 billion at the end of 2011 from EUR 52 billion at the end of 2009.

The analysis said that export-oriented multinational companies will likely make the most investments in Hungary, while companies operating in those sectors of the economy subject to the extraordinary taxes and credit-deprived SMEs are unlikely to increase their investments.

The rise in real wages resulting from the government's announced changes in personal income tax will generate a greater rise in domestic savings than in domestic consumption because high-income taxpayers will gain the greatest benefit from the tax changes, the analysis added.

The GKI-Erste analysis said that the market's positive assessment of the government's 2011 budget and euro convergence-program should lead to a slow improvement in confidence toward Hungary. A lasting effect will require, however, the announcement and the launch of systematic reform measures on the expenditure side, they warned.

The analysis said that the average euro-forint exchange rate would be around 270 in 2011, while the National Bank of Hungary would cut the base rate 5.0%, though not lower, next year. (MTI Econews)