MNI INTERVIEW: Hungary Needs More Growth For Fiscal Target

Hungary’s 2024 budget deficit will exceed its new target unless growth rates improve and the government follows through with plans to trim public spending, the president of the State Audit Office of Hungary told MNI in an interview.

“If economic growth accelerates in the coming months, the deficit target of 4.5% [of GDP] looks feasible,” Laszlo Windisch said. “If, on the other hand, the economy does not gain momentum, there is little point in continuing to curb it through budgetary constraints. Of course, there may be situations in which the government is forced to take such steps.”

While it could make sense for the government to allow a higher fiscal deficit, it would have room to cut its own investment spending if necessary, said Windisch, whose role includes commenting on proposed budget legislation and evaluating the use of public funds.

“Investment rates in the competitive sector of the Hungarian economy are high, so it is not very detrimental to economic growth if the government - temporarily - takes a smaller role in investments.”

April’s budget deficit was lower than expected, but May will be a “bad month”, said Windisch, adding that 9.8% increase seen in budgetary revenues compared to last year has been mainly driven by factors including higher earnings.

Q1 GROWTH

“The majority of revenues are lower than what is expected in proportion to time, so a rebound in growth would be essential to improve the budgetary balance. There is still a lot of uncertainty about corporate tax revenues, but no significant shortfall is likely for other taxes.”

Flash data last month showed Hungary’s economy expanded by a consensus-beating 0.8% in Q1 2024, despite a 10.4% fall in industrial production in March.

The increase in growth has been mainly driven by increased export capacity, and will require a further increase in demand for Hungarian products if it is to be maintained, Windisch said. “In this respect, at least in our EU markets, the situation is not rosy.”

Strong real wages rises should boost household consumption “sooner or later,” he said, but the “optimal scenario” of rising imports being offset by a growth in exports is more likely in the medium-term than this year.

GOVERNMENT RELATIONS WITH CENTRAL BANK

In recent months the relationship between the National Bank of Hungary and the government in Budapest has been tested, with defenders of the NBH arguing that its independence is under threat. Those more critical of the institution point to losses of HUF 402 billion in 2022 alone - leaving total capital at negative HUF2.1 trillion, equivalent to around 3% of GDP.

Losses from monetary policy measures have not usually been included in the SOA’s annual audit of the NBHs own financial management, Windisch said, though examinations were carried out in 2013 - when losses hit HUF40 billion - and on two subsequent occasions. (See MNI EM POLICY: NBH Set For Second 50Bp Cut, H2 Outlook Less Clear)

However, legal changes in 2023 mean that automatic loss compensation from the government’s core budget has been replaced by a “careful assessment” of the causes and consequences of central bank losses, he said.

“The Hungarian National Bank has recently sent the necessary documents for this to the Fiscal Council. The Council will have to take a position on the need for budgetary support in the context of its opinion on the budget bill for next year. Thus, the causes and consequences of the Hungarian National Bank becoming loss-making will be assessed by the SAO again this year to support the Council's decision,” Windisch said.