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Monday, January 14, 2008

Hungary Budget Deficit 2007

Hungary's budget deficit as calculated by European Union standards was probably 5.7 percent of gross domestic product last year, the narrowest since 2001 according to Finance Minister Janos Veres in a press conference in Budapest this morning. The shortfall, which compares with an original deficit forecast of 6.8 percent of GDP for 2007 and 9.2 percent deficit in 2006, is a first estimate at this point. The final figure will probably be between 5.5 percent and 5.8 percent, Veres said.

Now while this improvement in Hungary's finances is very welcome, I think we should all be bearing in mind that the very low GDP growth reading we have been getting in 2007 were in the context of a still very accomodative (to the tune of possibly 5.5%) fiscal stance. This support is going to be gradually withdrawn, and the Bank of Hungary will have great difficulty easing interest rates and thus loosening the monetary stance, even while the external environment (think exports) is deteriorating quite rapidly. I therefore fail to see where all the short term optimism - ie that things are going to get better, rather than notably worse, comes from quite frankly.

``Budget policy was influenced by disciplined spending and the fact that there was extra revenue from a whitening of the economy,'' Veres said. ``There was more revenue from taxes and social security contributions than we planned.''

Hungary has budgeted a deficit of 4 percent of GDP for this year, still exceeding the EU's limit of 3 percent. The country will be ``near'' the 3 percent mark by 2009 as a result of ``disciplined'' budget policies, Veres said. It is precisely this kind of fiscal tightening, which is undoubtedly necessary, which makes me question the unrealism of some of the estimates we are seeing for future growth.

Better than expected revenue in 2007 totaled 362 billion forint ($2.1 billion), including 152 billion forint from higher income taxes and social security contributions as a result of wages rising more than expected. A crackdown on tax evasion yielded 80 billion forint more than planned in revenue, more than half of it collected from personal income tax. Interest expenses were 105 billion forint less than planned because Hungary was able to borrow at lower yields than the government had expected.

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