In the shadow of the procedure: this way the budget cannot be overturned

Finance Minister Mihály Varga explained it in detail in mid-June For indexthat “at the end of the year, the situation will be more favorable than ending with a deficit of 4.5 percent, since we are on a budgetary path where the deficit target can be maintained”. excessive deficit procedure, and Hungary is among them.

It was later revealed that the budget closed with a deficit of HUF 107.8 billion in June – based on the report of the Ministry of Finance. This value is considered the most favorable sixth monthly indicator in the last 22 years. The public finances ended the first half of the year with a total deficit of more than HUF 2,656 billion. The central budget posted a deficit of HUF 2,640 billion, and the financial funds of the social security system posted a deficit of almost HUF 162 billion, while the separate state funds produced a surplus of nearly HUF 146 billion.

Regarding the data, the Ministry of Finance emphasized that by the end of June, more than HUF 2,009 billion had been spent on interest payments, which is HUF 649 billion higher than in the same period of the previous year. The increase in payments this year can be explained by the fact that the interest payment date of some Premium Hungarian Government Bond (PMÁP) series was due in the first quarter.

Excessive deficit proceedings are launched against several countries

“At the beginning of the year, due to high interest expenses and lower than expected tax revenues, a significant budget deficit arose, totaling HUF 2,321.4 billion. In the second quarter, the situation somewhat consolidated, VAT revenues started to increase, but in the first half of the year they accounted for only 41 percent of the entire annual appropriation” – this is how Equilor senior analyst Zoltán Varga evaluated the current state of the budget when contacted by Economx.

Image: Economx

In the second half of the year, the development of internal consumption will be key, which is already showing some improvement, however, according to analysts, a more dynamic growth than this may be necessary in order to achieve the budget deficit target without further amendments.

It is worth noting here that retail turnover – which is perhaps the most effective indicator of consumption – increased by 3.6 percent in May compared to the same period of the previous year, but remained essentially unchanged compared to the previous month.

Consumption is important from the point of view of the budget because the Hungarian tax system focuses on this. The higher the consumption, the higher the revenue the government can count on.

“If tax revenues begin to grow more dynamically in the second half of the year as a result of the revival of domestic consumption, it is expected that there will be no need to further modify the 4.5 percent deficit target, the recently announced tax and duty increases and the cutback in public investments have brought the targets closer to being achieved. A possible minor amendment may take place in the last months of the year, if GDP growth does not reach the government’s expectation of 2.5 percent,” Zoltán Varga summed up for our newspaper.

The analyst also reminded that the development of the accumulated public budget deficit this year is roughly the same as in 2022 and 2023, when the deficit was primarily increased by the loss suffered on the energy bill. The European Commission initiated excessive deficit proceedings against several of the member states of the European Union, Belgium, France, Italy, Malta, Poland, Slovakia and Hungary. In these member states, this year’s deficit may also be between 4-6 percent. The other Member States can probably meet the requirements.

There are still plenty of questions

According to Equilor, there are already faint signs of improvement, but several risks can still be identified, including a downside growth risk around domestic consumption and a global decline in demand for batteries. In the first five months of this year, sales of battery vehicles in the region increased by only 2.4 percent.

This also had an impact in Hungary: in May, the production of electrical equipment, which accounts for 10 percent of the manufacturing industry, fell by 18.7 percent from a year earlier, the largest among the sub-sectors. Among the two most significant sub-sectors, the volume of production of batteries and dry cells fell by 32 percent, and that of electric motors, power generators, distribution and control devices by 12 percent.

The government can adequately control the spending side, this would only change if energy prices were to run wild again. Most of the question marks are on the revenue side

– Zoltán Varga, Equilor’s senior analyst, summed up in response to Economx’s inquiry, adding that it is worth looking into the situation of the German economy, which significantly affects Hungary’s export earnings and GDP growth.

Image: Economx

The development of the volume of German industrial production is always a negative surprise, a decline was measured in April and May on a monthly basis, and in an annual comparison the decrease was 6.7 percent in the previous month. “Factory industry orders, which act as a kind of predictive indicator, are also continuously decreasing, here they showed a drop of 8.6 percent in May compared to the same period last year. For the time being, therefore, there is no visible positive turn in the foreign markets, which could significantly improve the domestic growth prospects for the next quarters,” said Zoltán Varga.

Thus, as a conclusion, it is also worth recalling the previous words of Mihály Varga. The head of the ministry stated earlier that due to the export capacity of the economy, it is now worth paying attention to the external environment: “The biggest uncertainty is the German economy. According to German economic experts and politicians, the model following the Second World War is now in crisis, which has dragged Europe for the past decades. According to the data of the G7 countries, they work the least in Germany, and in Asia and America they work much more hours.”

According to the Minister of Finance, although there are some signs of optimism, Germany’s problems are linked to the technological change affecting the automotive industry, and the Germans have not yet been able to provide a real answer to this complex task. According to Mihály Varga, it is an ongoing task to improve Hungary’s competitiveness regardless of the German economy. “The current proposals of the Hungarian government can improve the economy’s stability and competitiveness.”

Proceedings against Hungary: Brussels intervenes in the budget deficit

The Council of the European Union has officially launched its deficit procedure against the member states with flagrantly high public budget deficits, including Hungary.
If you want to know more, you can read more here.

Source: www.economx.hu