June 12th, 2012

Fiscal Council recommends alternative macro projection for 2013 draft budget


Hungary’s Fiscal Council has proposed the government draw up an alternative, less favourable macroeconomic projection because of growth risks in an opinion on the 2013 budget draft. The opinion, published on the website of Parliament, was adopted by a unanimous decision at a Council meeting on June 8.

The 1.6pc growth projection on which the 2013 budget draft is based will only materialise if domestic demand picks up and investor confidence improves significantly, the Council said. The government must be prepared to manage the existing downward risks, such as risks related to the euro-zone, which, if they become reality, could affect both sides of the budget, the Council added.

The Council said the allocation for the Country Protection Fund should be raised and amendments to reduce risks should be made based on the alternative projection.

It said that achieving the deficit and state debt targets would be realistic if such an alternative projection is prepared.

The Council noted that achieving the government’s deficit and state debt reduction targets for 2013 assumes the full implementation of measures outlined in the Szell Kalman Plan 2.0, an updated structural reform programme. It noted that more adjustments could become necessary on the revenue and expenditure sides to achieve targets in light of economic risks.

The government targets a 2.2pc of GDP deficit for 2013 in the budget draft, in line with its latest Convergence Plan.

The Council recommended that the government ensure the timely adoption of legislation resulting in increased revenue and savings planned in the Szell Kalman Plan 2.0, citing flaws with some revenue and spending targets in the draft.

The government should also review some risky uncapped spending items and take steps to reduce the danger of an overshoot, the Council added.

Despite a worse than expected economic performance in 2012, the fiscal deficit target – 2.5pc of GDP – can be met with additional measures taken in the updated structural reform plan and with the permanent freezing of temporarily blocked budget reserves, the Council said. The Council added that it would prepare a detailed analysis of first-half development in July.

The Council warned that some of the measures already taken or planned to preserve economic stability weaken growth prospects. Some of the tools used to achieve the deficit targets are “dysfunctional” and their effect on growth is “disputable”, the Council added.

Slower 2013 growth would lower the tax base, especially with the shift in budget revenues towards turnover-based taxes and duties, the Council said. Part of the revenue targets are insufficiently based or are not backed by appropriate calculations or analyses, the Council added, noting that these problems of quality add to revenue side risks.

The Council said the 2013 budget draft contains considerable changes in the structure of expenditures related to the transfer of tasks from local governments to the central government and changes to the financing for these tasks. The Council said that it lacked the information to form an opinion on the effect of these changes on the functioning of institutions and on the real economy because many of these reforms are unfinished, which is a risk in itself.

The Council also warned that unrealistically steep expenditure cuts taken without proper analysis and executed without the appropriate organisation could result in unplanned overspending or in future spending, thus raising the hidden fiscal deficit.

The Council said that the government’s strategic goals – to make the state smaller and more efficient, to reduce the deficit to a low level, to cut state debt and to boost employment and competitiveness – point in the right direction.

The government will discuss the 2013 budget draft again at a cabinet meeting on Wednesday, the National Economy Ministry told MTI. Following a possible reworking of the draft, the government will submit the budget bill to Parliament on June 15, it added.

The opinions of both the Fiscal Council and the State Audit Office will be taken into consideration when the bill is debated in Parliament.

The Fiscal Council, comprised of the National Bank of Hungary governor, the head of the State Audit Office and an independent economist, issues opinions on budget bills.

In its opinion published on Monday, the Council said it saw no reason for disagreement with the draft from the point of view of its credibility and its practical implementation.

  • Democrat

    “and investor confidence improves significantly” If only the esteemed Council had the guts to recommend changing policy rather that simply juggling the figures to reflect yet another failure.

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