György Matolcsy suggested on Monday that public investment should be halved so that the budget deficit could return to 3%. If we look beyond the numbers, we see that it would be serious austerity, but it wasn’t impossible to counteract. It is a question of whether it is worth it.

We’ve rarely seen Gyorgy Matulci spectacularly criticize the government’s economic policy thus far, but that’s exactly what has been happening for weeks now. After talking several times about the size of the error in editing the budget deficit, the central bank also wrote in an article published in the online version of Magyar Nemzet that the indicator should fall to 3% instead of the planned deficit of 5.9% by 2022. Matolci believes the starting point is wrong, the 2022 budget cannot be the restart, because the Hungarian economy has already restarted this year. Therefore, the deficit cannot be justified, and the demand accumulated during the crisis does not meet the supply, which leads to higher inflation. According to Matulci, the real danger is that if financial markets consider Hungary’s economic policy to be unsustainable, a strong financial attack could hit Hungary.

The Governor of MNB also made a proposal on how to achieve the goal of reducing the deficit:

Cutting public investment in half would be enough to return to equilibrium.

This sounds like a very radical proposition – but is it really possible for a country to suddenly cut its spending in half? It may sound strange, but it wouldn’t be entirely impossible. In 2020, budget bodies in total 1,608 billion HUF have been allocated for investmentsA bigger increase is likely this year, if they try to salvage half of that, that would mean a return to the 2016-2017 level. Which would be dangerous austerity, but not brutal, unattainable austerity.

If we look at investment statistics, we put them quite simply behind complex relationships:

The government is trying to spin the economy by spending a lot of money, and the question is whether it is being spent for good purposes.

In the first quarter of this year, the value of investments in Hungary increased by 2.5 percent compared to the previous year – a particularly good figure, if we recall that in the first month and a half of the first quarter of 2020, everyone was preparing for a normal year, and this year was Crisis period in the first three months. But it is also clear that this number can only be very high due to the condition.

  • The value of enterprise investments decreased by 6.3 percent, while the value of investments of budgetary bodies increased by 31 percent.
  • The latter is also worth splitting into two parts. Municipal developments have declined, no wonder they have to manage with less and less money, and it is logical that they have limited their spending.
  • The increase can thus largely be attributed to one major reason: Central government purchases of tangible assets increased by nearly 100 percent.
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So this should be saved, Matulsi suggested. At the moment, only the Central Statistical Office has published such a number of figures in terms of HUF: state and local government bodies together spent HUF 185 billion on investments in the first quarter of last year and HUF 260 billion this year.

But what did this money go to? If the answer to this question was that flood protection, for example, most people probably wouldn’t have guessed it first—although the Central Statistical Office also emphasized that among the large branches of the national economy, public administration, and defense, they measured an increase in of 32.6 percent.

It does not help to see clearly the amount of public and corporate investment in each sector, and in any case we can safely assume that a 45% increase in human health and welfare or a 31% increase in education is largely due to the state.

Of course, it is understood that during a pandemic, the government spends a lot of money on health care, and it is also clear that once the epidemic is passed, that rate will decrease – although it is useful to add this number not including the purchase of ventilators, it appeared in Previous quarters data.

Yes, but not all of them have the largest increase in investment. But in one it is difficult to assimilate: among other services. It can fit just about anything that can’t be classified anywhere else. In other words, public bodies seem to make a large number of small purchases, which amount to a very high final amount.

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The same situation is shown by the extent to which public expenditure distorts the formation of investment. Typically, the six largest sectors of the economy (real estate, manufacturing, management, commerce, logistics, and agriculture), which account for nearly three-quarters of total investment, provide an almost accurate picture of what businesses and the state spend. on investment funds. This time, however, the Central Statistical Office measured a 2.5 percent decrease in these six sectors together, but in all the other, smaller sectors, the increase was so significant, largely due to public spending, that dragged the index back to 2.5 percent.

Matulci also noted that it might not be a good idea to just think that EU leaders are not paying much attention now to member states that maintain their deficit target. In doing so, he formulated a stance that was tougher than many experts. The most common belief is that once the EU releases the deficit target during the pandemic, governments can take advantage of it and spend what they feel is important for crisis management, all that is needed is to really help them recover from the crisis. The central bank governor doesn’t want to see that much now – although it’s also a serious criticism of the Hungarian government that it doesn’t really help crisis management with a significant portion of the money earmarked for economic protection.



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