MNI INTERVIEW: Hungary Deficit Target "Realistic", Not Assured

The Hungarian government’s upwardly-revised projection for a fiscal deficit of 4.5% of gross domestic product this year is “realistic”, but USD1.8 billion in cuts to investment spending announced last week may not be sufficient to ensure the target is met, Fiscal Council of Hungary Chair Gabor Horvath told MNI.

“It may be that these savings amount to only 50% of what is needed, as some analysts feel, but it will very much depend on growth and tax revenue,” Horvath said, commenting on the cost-cutting moves which accompanied the government’s announcement last week that its earlier forecast of a budget deficit of 2.9% of GDP was too optimistic.

While a 2024 deficit of 4.5% is “realistic,” it leaves little room for any a big positive surprise, he said, though he noted that even the most pessimistic private forecasts prior to this announcement were for a deficit of below 6% of GDP. Still, he called the government’s fiscal announcement, which was brought forward from the autumn, positive for transparency, and sensible given that room for manoeuvre is reduced the more the year progresses.

“I think that the government is approaching it in a gradual manner, and that this is a first step assuming that the most positive outcome will come to pass, in which case they might not need further significant steps. We will know whether that is the case within a couple of months,” Horvath said in an interview. “And it’s possible to make savings of 100 or even 200 billion forints without resorting to major measures.”

SPENDING ONLY POSTPONED

But the government’s plans to carry out the suspended investment after 2024 could mean that it eventually has to increase taxes or cut other programmes in the future, Horvath warned, adding that tax increases tended to have the greatest fiscal impact.

“Spending can also be postponed, but this may have longer-term negative effects. You cannot cut investment spending every year, because USD1.8 billion is equivalent to one sixth, or 17%, of the entire investment budget for this year,” he added.

Horvath said he had become less optimistic for 2024 growth, with GDP more likely to expand by 2-3% rather than the 3% or more he had expected at the beginning of the year, as growth projections for the country’s biggest trading partner have also been downgraded.

Horvath noted the cautious approach to communication with financial markets adopted in recent months by the National Bank of Hungary, which has begun slowing rate cuts following a period of rapid disinflation and monetary easing. (See MNI EM WATCH: HNB Slows To 50BP, Cites Sentiment, Sticky Core)

This has granted it both sufficient room to manoeuvre in policy terms and allowed it to remain credible, Horvath said, although some risks remain.

“It also appears that communication between the central bank and the government has become more aligned, which I welcome. I hope this continues, because room for manoeuvre is limited.”