Over the past few days, several important new data about this year’s budget performance have come out. And earlier, the Central Statistical Organization published data for the first quarter of the general government sector (numbers based on accrual basis), and then on Friday, the preliminary cash flow figures of the Ministry of Finance for the first half of the government’s general performance arrived. Accordingly, the general government deficit is horrific at first glance, but is broadly in line with revised expectations.
Regarding the first six-month balance, Peter Verovacs, chief economist at ING Bank, said the deficit in the first half of the year had increased due to extraordinary expenditures, but so far the headline numbers were on track. They expect it
The government’s loose fiscal policy behavior will continue in 2022 as well.
In June, the central government subsystem closed with one of the highest deficit levels, resulting in a 43% increase in annual deficits by the end of June. According to the analyst, the apparently high deficit does not jeopardize this year’s deficit target of 7.5%.
Since the monthly cash flow data are raw numbers, the detailed operations are not yet known, however, Peter Verovac calculates that Budget revenues rose in parallel with the lifting of restrictive measures due to the virus and the resumption of life and the economy, Mainly value-added tax revenue and profit. The spending side has recently been affected by one-off retirement benefits, and the economist says the government continues to pre-finance a large part of EU projects.
Mihaly Kovacs, Analyst at OTP Bank He expressed the same opinion regarding the government sector data that was previously published for the first quarter. On an annual basis, for example, state VAT revenue increased 15.5% in the first quarter of this year (last year’s quarter was essentially free from the effects of the coronavirus), while nominal GDP grew by 5%. Revenue from excise taxes increased by 8.3%, amounts from income taxes by 3.6%, and contribution revenue was essentially stagnant, but according to analysts’ calculations, had it not been for the benefits provided at the time of the pandemic, there would have been an increase of 3.5%..
By the way, the OTP Bank expert also wrote on the basis of a series of detailed income data of existing transactions Major sources of tax revenue may override this year’s plans, particularly on the VAT and income tax lines. This is expected to amount to about 1-1.5% of GDP.
Based on this, Mihaly Kovacs expects the government to spend this additional revenue from this year’s budget, and it will do the same next year. The resulting budget room for maneuvering will be used in part by the government to cover new economic support measures, or it will be spent significantly at the end of the year.
It should be noted here that Péter Szijjártó and Mihály Varga have announced successively new economic stimulus measures in recent days.
In general, the prosecutor’s office analyst does not expect that the government, along with the new expenditures, will fail to meet the established budget deficit targets. This will only be imposed by further closures, which is unlikely at the moment, but cannot be completely ruled out, given the spread of the variable delta virus in neighboring countries.
Peter Verofax, in his commentary, referred to the controversy between the central bank and the government, which is related to the speed of fiscal consolidation. The ING analyst says there are clear indications that the government prefers economic support to faster deficit reduction. The government can do all this as long as EU rules are more lenient regarding the Maastricht standard of 3% of GDP, the analyst believes.
This is also the reason why the government is able to set a deficit target of 5.9% of GDP next year, while the central bank is calling for the need to speed up fiscal consolidation, mainly for inflationary reasons. However, even in the midst of all this, the government can insist on a higher deficit target, which is why the central bank must remain in a tightening mode, Peter Verovax explained.
In general, based on recent financial and growth data, as well as analyst expectations, we can say that
The government will make every effort to support economic growth for this year (which, according to current forecasts of experts, may already exceed 6%) at the expense of the financial room for maneuver created during the year.
In other words, the incoming tens or hundreds of billions are not expected to improve the budget balance. This, in turn, will only increase GDP growth in the coming quarters. In view of all this, we will not be surprised if, towards the end of the year, new measures of economic policy that directly affect the population will come from the government in addition to the measures announced so far (income tax deduction in 2022, investment incentives ).
Cover image source: MTI / Koszticsák Szilárd