A piece of good news regarding the recent financial packages is that the government has finally committed itself to keeping the budget deficit below 3 per cent of GDP for the current political cycle, in a way that from 2012 on this goal would be met without using up the assets of private pension funds.
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A piece of good news regarding the recent financial packages is that the government has finally committed itself to keeping the budget deficit below 3 per cent of GDP for the current political cycle, in a way that from 2012 on this goal would be met without using up the assets of private pension funds. Current EU legal rules require that the assets originating in the pension fund takeover should be recorded as income in 2011, thus the planned use of these funds (HUF90bn in 2012 and HUF220bn in 2013-2014) means in fact that the real goal, as far as the EU accounts are concerned, is only keeping the deficit just below 3 per cent of GDP instead of reducing it further.
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The combined effects of the inflow of this year's various one-off revenues (assets from the nationalisation of pension funds, extra levies and the contributions of the remaining members of private pension funds) that will not be available in subsequent years, and the further reductions of personal income taxes under the provisions of the tax law will result in a deficit amounting to about HUF1200bn by 2013. In order to maintain this year’s general government deficit targets in the future, this shortage should be overcome in some way. The automatic increase of general government revenues due to the expected 3 per cent GDP growth may cover some HUF500bn, if a strict government expenditure policy is maintained. Therefore, the announced expenditure cuts of about HUF680bn, if implemented, seem to be adequate to keep the deficit below 3 per cent of GDP.
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However, the realisation of the savings from the packages targeted to specific areas remains highly doubtful. Unfortunately, the announcement does not contain some important details of the measures and no sufficient information is available on how these goals are to be achieved. In most cases the orders of magnitude of the goals appear to be unrealistic. The questions will only be answered later, when the packages are opened, that is, when the specific laws are submitted to Parliament.
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If the recently announced measures to reduce expenditures result in less-than-expected savings, the government may still present a B-plan. This plan might include measures partly making the HUF250bn freezing permanent and partly in the form of introducing taxes to raise revenues. As a result, the general government targets can be met, though the sustainability of the supporting measures may become questionable.
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It is regrettable that the recent announcements concern primarily savings in budgetary transfer costs, whereas the long-awaited restructuring and streamlining of large fiscal institutional systems are still not on the agenda. As far as confidence in the tax system is concerned, it is unfortunate that a previously announced multi-year tax reduction was again revoked, although most probably this decrease of corporate tax rate to 10 per cent should not have been announced originally due to budgetary disequilibria.
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The government's economic policy priority has changed from stimulating growth to reducing public debt. It might even be a welcomed change, however, the markets will only accept it as credible if the opening of the packages materializes and brings this result.
