COMMISSION STAFF WORKING DOCUMENT Analysis by the Commission services of the budgetary situation in Hungary following the adoption of the Council Decision of 24 January 2012 under the Excessive Procedure for Hungary
Date: 2012-03-06
Institutions: European Commission
Subjects: EU control, Hungary, anti-crisis plan, budget deficit, budgetary control, financial year, stability pact

EUROPEAN COMMISSION 

Brussels, 6.3.2012  
SWD(2012) 43 final 

COMMISSION STAFF WORKING DOCUMENT 

Analysis by the Commission services of the budgetary situation in Hungary following 
the adoption of the Council Decision of 24 January 2012 under the Excessive Procedure 
for Hungary 

Accompanying the document 

Recommendation for a 

COUNCIL RECOMMENDATION 

with a view to bringing an end to the situation of an excessive government deficit in 
Hungary 

{COM(2012) 104 final} 

 
 
 
 
  
 
  
 
 
 
 
COMMISSION STAFF WORKING DOCUMENT 

Analysis by the Commission services of the budgetary situation in Hungary following 
the adoption of the Council Decision of 24 January 2012 under the Excessive Procedure 
for Hungary 

Accompanying the document 

Recommendation for a 

COUNCIL RECOMMENDATION 

with a view to bringing an end to the situation of an excessive government deficit in 
Hungary 

1

 
 
 
  
 
 
 
 Introduction 

On 5 July 2004, the Council decided that Hungary had an excessive budget deficit and issued 
a recommendation under Article 104(7) of the Treaty establishing the European Community 
(TEC)  setting  a  deadline  for  correction  of  2008.  After  the  Council  had  decided  twice,  in 
January and November 2005, in accordance with Article 104(8) TEC, that Hungary had not 
taken  effective  action  in  response  to  its  recommendations,  it  issued  a  third  Article  104(7) 
recommendation to Hungary in October 2006, postponing the deadline to 2009. In July 2009, 
against  the  background  of  a  severe  economic  downturn  which  triggered  fiscal  adjustment 
measures and the provision of EU/IMF balance of payments support, the Council concluded 
that  Hungary  had  taken  effective  action  and  issued  revised  recommendations  under  Article 
104(7) TEC, setting 2011 as the new deadline to correct the excessive deficit. 

In particular, the Council recommended Hungary to ensure a rigorous implementation of the 
adopted and announced corrective measures to respect the government deficit target of 3.9% 
of  GDP.  Moreover,  it  recommended  spelling  out  and  adopting  in  a  timely  manner  the 
consolidation  measures  necessary  to  achieve  the  correction  of  the  excessive  deficit  by  2011 
and  ensuring,  at  least,  a  cumulative  0.5%  of  GDP  fiscal  effort  in  2010-2011.  The  Council 
established  the  deadline  of  7  January  2010  for  the  Hungarian  authorities  to  take  effective 
action. 

In  its  27  January  2010  Communication  to  the  Council,  the  Commission  concluded  that 
Hungary  had  taken  effective  action  in  response  to  the  latest  Council  recommendations, 
notably  since  the  deficit  outcome  for  2009  was  expected  to  be  very  close  to  the  target  but 
"alerted about considerable risks attached to the 2010 deficit target, both on the revenue and 
the  expenditure  side".  The  Council,  in  its  12  July  2011  Opinion  on  the  2011  update  of  the 
Convergence Programme (CP) of Hungary, recommended that Hungary "strengthen the fiscal 
effort in order to comply with the Council recommendation to correct the excessive deficit in 
a sustainable manner […] and ensure that the budget deficit is kept safely below the 3% of 
GDP threshold in 2012 and beyond".  

On  24  January  2012,  the  Council  adopted  a  decision  under  Article  126(8)  of  the  Treaty 
establishing  that  Hungary  had  not  taken  effective  action  in  response  to  the  Council 
Recommendation of July 2009. The Council noted that while Hungary formally respected the 
3%  of  GDP  reference  value  by  2011,  this  was  not  based  on  a  structural  and  sustainable 
correction. The budget surplus in 2011 hinged upon substantial one-off revenues of over 10% 
of GDP and  was accompanied by a cumulative  structural deterioration in 2010 and 2011 of 
over  2%  of  GDP  compared  to  a  cumulative  fiscal  improvement  of  0.5%  of  GDP 
recommended by the Council. Moreover, while the authorities adopted and to a large extent 
already  implemented  substantial  structural  measures,  partly  in  order  to  compensate  for  the 
substantial tax cuts of above 2% of GDP decided in the second half of 2010, the 2012 budget 
deficit  was  foreseen  not  to  exceed  the  3%  of  GDP  reference  value  again  only  thanks  to  net 
one-off  revenues  of  around  0.7%  of  GDP.  In  fact,  the  non-durable  nature  of  the  correction 
was evidenced by the fact that in 2013 that the headline deficit (estimated at 3¼% of GDP at 
the  time)  was  expected  to  breach  the  reference  value  of  the  Treaty  once  more  even  after 
taking  into  account  additional  measures  announced  since  the  Commission  services'  2011 
Autumn Forecast.  

Following this Council decision, the Council decided to suspend a part of the Cohesion Fund 
commitment appropriations for the year 2013 for Hungary (in line with Article 4 of Council 
Regulation (EC) No 1084/2006). 

2

 
 
This  document  examines  the  macroeconomic  and  budgetary  outlook  for  Hungary  to  set  the 
stage  for  a  Commission  recommendation  for  a  new  (fifth)  recommendation  under  Article 
126(7) of the Treaty to ensure a sustainable correction of the excessive deficit. In particular, it 
examines the macroeconomic and budgetary developments since the Council decision under 
Article 126(8) of the Treaty on 24 January 2012 to step up the excessive deficit procedure for 
Hungary1. The assessment takes notably into account the new macroeconomic outlook in the 
Commission services' 2012 February Interim Forecast and information about recent budgetary 
developments, including a new consolidation package of the Hungarian authorities, published 
on 21 February 2012 in the official Gazette. 

1. 

ECONOMIC DEVELOPMENTS  AND OUTLOOK 

In 2011, GDP is expected to have continued expanding at a moderate rate  of 1.7%  (against 
1.4%  in  the  autumn  forecast),  driven  exclusively  by  the  external  balance.  The  preliminary 
data on GDP growth  in  the second half of the year surprised on the upside, but factors that 
contributed to this, such as the strong rate of growth in the agricultural sector, are unlikely to 
repeat  in  2012  as  this  was  against  the  background  of  poor  performance  in  2010. 
Developments that occurred after the cut-off date of the Commission services 2011 Autumn 
Forecast paint an overall weaker picture of short-term growth prospects. The economy is now 
forecast  to  be  near  standstill  in  2012:  real  GDP  is  expected  to  contract  slightly  by  0.1%  in 
contrast with the 0.5% growth projected in the autumn 2011. 

The  external  environment  is  worse  than  expected,  with  Hungary's  largest  export  markets 
growing  at  a  lower  rate.  In  addition,  economic  policies  such  as  the  extraordinary  sectoral 
levies  and  the  early  foreign  exchange  loan  repayment  scheme,  which  allowed  the  early 
repayment of foreign-currency denominated mortgages at discounted rates, are likely to have 
negative  consequences  for  growth  and  the  fiscal  balance.  Employment  prospects  are  also 
somewhat more negative than expected in the autumn. 

On the other hand, the agreement signed on 15 December 2011 between the government and 
the Banking Association improved on the government's original early repayment scheme. The 
agreement  includes  four  pillars  whose  impact  is  likely  to  play  out  over  various  channels, 
including  a  cash-flow  effect  for  FX  mortgage  holders.  The  overall  effect  of  this  scheme  in 
combination  with  the  December  agreement  is  still  negative  for  the  financial  sector  and  thus 
for credit supply, although less so than before as the public sector will now share part of the 
cost.  

Finally, the pace of inflation will again rise in 2012 due to in large part to increases in indirect 
taxes.  Although  the  rise  in  inflationary  expectations  could  ceteris  paribus  have  reduced  the 
real  interest  rate  (which  indeed  happened  temporarily  following  a  peak  in  August  2011), 
interest  rates  have  climbed  up  again  because  of  increases  in  the  policy  rate  and  the  risk 
premia. (For further details, see the February 2012 Interim Forecast2.) 

1 For more details regarding this recommendation see the accompanying Commission Staff Working Document 
at: 
http://ec.europa.eu/economy_finance/economic_governance/sgp/pdf/30_edps/other_documents/2012-01-
11_hu_communication_swp_en.pdfp 
2 The latest interim forecast of the Commission services was published on 23 February 2012. For details see: 
http://ec.europa.eu/economy_finance/articles/eu_economic_situation/2012-02-23-interim-forecast_en.htm  

3

 
 
                                                            
Table 1: Comparison of key macroeconomic projections 

Real GDP  
(% change) 

Current account balance 
(% of GDP) 

HICP inflation 
(% change) 

CP April 2011 
2012 Budget  
COM IF 2012  
CP April 2011 
2012 Budget 
COM AF 2011 
CP April 2011 
2012 Budget1 
COM IF 2012 

2010 
1.2 
1.2 
1.3 
2.1 
2.1 
1.0 
4.7 
4.9 
4.7 

2011 
3.1 
1.9 
1.7 
1.6 
2.5 
1.7 
4.0 
3.8 
3.9 

2012 
3.0 
1.5 
-0.1 
2.8 
3.7 
3.2 
3.4 
4.2 
5.1 

2013 
3.2 
na 
1.6 
2.7 
na 
3.8 
3.0 
na 
4.1 

Notes: 
1 National Consumer Price Index (CPI) 
Source: 2011 update of Convergence Programme (CP); Commission services’ 2012 Autumn Forecast (COM AF 2011); 
Commission services’ 2012 Interim Forecast (COM IF 2012); 2012 budget for Hungary. 

2. 

BUDGETARY SITUATION AND PROJECTIONS FOR THE PERIOD 2011-2013 

2.1. 

Estimated outturn for 2011 

In 2011, a budgetary surplus of 4.1% of GDP is now expected, which is achieved primarily 
thanks to one-off revenues of almost 10% of GDP linked to the elimination of the obligatory 
private pension scheme.3 The headline deficit net of one-off effects is estimated to be around 
5½% of GDP. It may be useful to note that the elimination of the obligatory private pension 
scheme did not only result in one-off revenues due to the asset transfer but also in permanent 
revenues  of  1¼%  of  GDP  since  the  pension  contributions  of  the  employees  are  paid  to  the 
public  pension  pillar  instead  of  the  private  one.  In  the  long  run,  however,  this  permanent 
deficit  improving  effect  will  be  gradually  counterbalanced  and  eventually  exceeded  by  the 
higher public pension expenditures. 

The surplus currently expected for 2011 is more favourable than the surplus of 3½% of GDP 
included in the January SWP accompanying the Commission recommendation for a Council 
decision under Article 126(8) of the Treaty, which is explained by: (i) the balanced budget of 
the  local  government  sector  suggested  by  the  official  preliminary  data  submitted  to  the 
Commission on 14 February 2012 instead of the earlier expected deficit of ½% of GDP; and 
(ii) the better than expected budgetary revenue developments by 0.3% of GDP, especially in 
December  2011  (notably  from  VAT  and  CIT)4.    These  developments  are  only  partly 

3 In 2011 the balance of the one-off components was 9.5% of GDP. Beside the revenues of 9.9% of GDP from 
the elimination of the obligatory private pension scheme, the full amount of the extraordinary sectoral levies of 
½% of GDP (in the energy, telecommunication and retail sector) and the half of the extraordinary levy on the 
financial institutions amounting to 0.3% of GDP contributed to the one-off or temporary revenues in 2011. At 
the same time, one-off or temporary expenditures include the VAT reimbursement of 0.9% of GDP due to the 
decision of the Court of Justice of the European Union, the capital injection of 0.1% of GDP into the Hungarian 
Development Bank and the tax rebate of 0.2% of GDP on the bank levy in the light of the agreement with the 
banks. 
4 The higher VAT revenues can be also partly explained by the temporary enhancement of the Tax authority in 
this field and the advanced purchases due to the VAT rate increase in 2012. Regarding the higher than expected 
CIT  revenues,  its  permanent  effect  can  be  significantly  lower  since  the  potentially  higher  than  required  tax 
payments at the end of 2011 may be reclaimed (mainly) in the course of 2012. All in all, the higher than earlier 
expected  tax  revenues  at  the  end  of  2011  indicates  better  budgetary  outcome  also  in  the  outer  years,  which  is 
enhanced also by the January cash-flow data. However, this permanent effect will be probably significantly less 
than the impact in 2011. 

4

 
 
 
 
 
                                                            
counterbalanced by the higher than earlier projected 2011 budgetary cost (0.2% of GDP) of 
the "burden-sharing" agreement between the government and the banks related to the foreign 
exchange loans issue. 

Graph 1: General government balance 

2.2. 

Update of deficit projections for 2012 

Based on the latest developments, the budgetary deficit in 2012 is foreseen at around 3% of 
GDP  while  it  was  expected  to  be  2¾%  of  GDP  in  the  January  SWP  accompanying  the 
Commission recommendation for a Council decision under Article 126(8). This higher deficit 
forecast is mainly explained by the lower tax revenues in light of the downward revision of 
the  Commission  services'  growth  forecast  (currently  a  slight  recession  of  0.1%  is  foreseen 
instead  of  a  recovery  of  0.5%  with  a  corresponding  decrease  in  nominal  GDP)  resulting  in 
broadly  unchanged  revenue-to-GDP  ratio,  while  the  expenditure-to-GDP  ratio  goes  up;  and 
the higher interest expenditures altogether amounting to 0.3% of GDP. Regarding budgetary 
measures, the higher-than-expected outlays related to the public transport companies currently 
anticipated  by  the  Commission  services,  in  particular  for  the  state-owned  railway  company, 
may  increase  the  deficit  further  by  0.15%  of  GDP.  Other  developments,  such  as  foreseen 
slippages  related  to  pharmaceutical  subsidies  as  well  as  a  more  severe  than  projected 
behavioural  adjustment  of  the  companies  to  the  tax  hikes  contained  in  the  2012  budget  are 
foreseen to contribute to the higher deficit by another ¼% of GDP.5  

These adverse developments are estimated to be only partly compensated by the base effect 
(i.e. the permanent impact) of the better than earlier expected 2011 outcome (around ¼% of 
GDP)6 as well as higher than budgeted one-off revenues from licence fees (0.1% of GDP).7 

5  This  is  notably  indicated  by  the  high  proportion  of  companies  that  have  decided  to  stop  operations  in  the 
gambling sector. 
6 That is, the Commission services assume that the lower than earlier expected deficit of the local government 
sector  in  2011  will  decrease  the  2012  and  2013  budgetary  deficit  also  by  around  0.15%  of  GDP,  while  the 
permanent deficit improving impact of the higher tax revenues at the end of 2011 is around 0.1% of GDP.  

5

 
 
 
 
                                                            
Compared  to  the  adopted  2012  budget,  the  Commission  services  now  foresee  slippages  of 
more than 1½% of GDP. The Commission services' 2011 Autumn Forecast of 2.8% of GDP 
already  reflected  lower  revenues  mainly  linked  to  the  lower  real  GDP  growth,  the  higher 
outlays chiefly related to state-owned transport enterprises and maintenance of roads as well 
as higher expenditures due to the weaker exchange rates and higher bond yield assumptions. 
These  slippages  amounting  altogether  to  1%  of  GDP  were  assumed  to  be  largely 
counterbalanced by the eventual elimination of the extraordinary budgetary reserve of 0.7% of 
GDP,  which  was  created  on  top  of  the  usual  general  reserve  of  0.3%  of  GDP.  The 
Commission  services  assumed  that  the  extraordinary  reserve  would  not  be  spent,  while  the 
general reserve, based on historical evidence, was expected to be eventually spent. 8 

The projection in the January 2012 SWP accompanying the Commission recommendation for 
a  Council  decision  of  a  2012  budget  deficit  of  2¾%  of  GDP  included  further  slippages  of 
0.35% of GDP mainly due to the budgetary effect of the agreement with the banking sector, 
fully counterbalanced by measures resulting at increasing the extraordinary reserves by 0.4% 
of GDP to 1.1% of GDP.9 The updated deficit outlook of 3% of GDP incorporates additional 
deficit increasing developments of ¼% of GDP. This brings total slippages to more than 1½% 
of GDP compared to the budget, which can be counterbalanced by the extraordinary reserves 
increased from 0.7% of GDP to 1.1% of GDP resulting in a higher deficit by ½% of GDP than 
targeted  (2.5%  of  GDP).  That  is,  Commission  services  assume  that  the  full  amount  of  the 
extraordinary reserve of 1.1% of GDP will be eventually eliminated.   

Table 2: Evaluation of the 2012 budgetary forecast 

7  Deutsche  Telekom's  Magyar  Telekom  and  the  local  units  of  Telenor  and  Vodafone,  Hungary's  three  current 
mobile  operators,  won  extra  frequency  capacities.  Moreover,  Postal  service  Magyar  Posta,  power  company 
Magyar  Villamos  Muvek  and  development  bank  Magyar  Fejlesztesi  Bank  offered  HUF  10  billion  for  5 
megahertz of the 900 MHz frequency. These state-owned companies may pay fewer dividends into the budget in 
the coming years due to the direct cost of the licence fee and the expected investment costs.  
8  This  approach  takes  into  account  the  regulation  contained  in  the  budget  bill  which  is  expected  to  ensure  a 
cautious  use  of  this  reserve.  According  to  the  adopted  regulation,  the  extraordinary  reserves  cannot  be  used 
before September 30, 2012 and the government may decide on its use only if in the Autumn 2012 notification 
the  expected  EDP  deficit  for  2012  does  not  exceed  2.5%  of  GDP,  which  is  not  expected  according  to  the 
Commission  services  assessment.  As  a  consequence, only  a  limited  contingency  buffer,  the general  reserve of 
0.3% of GDP remains to offset any unforeseen adverse impacts. However, based on historical evidence, and also 
since the use of it is not linked to any strict condition, the Commission services assumed that the general reserve 
would be eventually spent. 
9 These measures are indicated as "consolidation package at the end of 2011" in Table 2. 

6

 
 
 
 
 
 
                                                                                                                                                                                          
2011 draft budget
Worse growth outlook and more cautious revenue forecast
Higher subsidy to the public transport companies and maintanance of roads
Assumption of a weaker exchange rate and higher yields on T-bonds and bills
Extraordinary reserve (assumed as a contingent expenditure cut)
2011 Autumn Forecast
Net effect of the adopted amendments submitted to the 2012 draft budget
Consolidation package at the end of 2011
Agreement with the banks (including secondary effects)
January SWP
Base effect

Better than expected tax revenues at the end of 2011

Better than targeted balance of the local government sector

Measures

Higher road toll

Additional financing gap for public transport companies
Macroeconomic and financial market developments

Further deterioration in the growth outlook (real GDP forecast -0.1% vs +0.5%)

Higher yields on T-bonds and bills 

Other developments

Recent data on the adjustment of the economic agents to the tax changes

Expenditure slippages at pharmaceutical subsidies

Higher licence revenues

Smaller transfer to compensate the loss of the central bank

Denominator effect

Current forecast update

2012
-2.5
-0.50
-0.25
-0.25
0.70
-2.8
-0.15
0.40
-0.20
-2¾
0.25
0.10

0.15
-0.10
0.05

-0.15
-0.30
-0.25

-0.05
-0.15
-0.10

-0.15

0.10

0.05

-0.05
-3.0

It  is  important  to  highlight  that  this  deficit  forecast  takes  into  account  the  0.7%  of  GDP 
temporary revenues from the sectoral and financial levy, which is the net effect of the gross 
one-off revenues of 0.9% of GDP and the tax rebate on the bank levy of around 0.2% of GDP 
in  2012.  Additional  one-off  revenues  from  the  licence  fee  of  0.1%  of  GDP  are  also 
incorporated  in  the  forecast.  However,  the  decision  to  permanently  divert  the  employers' 
pension contributions for those who are still members of the former obligatory private pension 
pillar to the state pension pillar, which was adopted at the end of 2011 and which contributed 
to the further increasing of the extraordinary reserves by 0.15% of GDP at the end of 2011, 
turned an earlier one-off revenue into a permanent one. That is, the de facto elimination of the 
previously obligatory private pension pillar altogether resulted in permanent revenue of close 
to 1½% of GDP, which will be gradually counterbalanced by increasing pension expenditures 
and in the long run exceeded by those expenditures.  

It  has  to  be  highlighted  that  the  pressures  on  those  who  are  still  members  of  the  earlier 
obligatory  private  pension  scheme  (such  as  the  above  mentioned  diversion  of  the  pension 
contributions  of  those  who  are  still  members  of  the  former  obligatory  pension  pillar  to  the 
state  pension  pillar  as  well  as  the  fact  that  employees  will  be  eligible  for  public  pension 
benefits contrary to the earlier legislation)10 may result in a further round of stepping back to 

10 This option is open until 31 Mach 2012. 

7

 
 
 
 
 
                                                            
the public pension pillar also due to the decreasing likelihood that the private pension pillars 
will survive since they do not receive pension contributions.  This  could eventually generate 
additional one-off budgetary revenues of up to ¾% of GDP in 2012 due to the transfer of the 
accumulated  assets  from  the  private  to  the  public  pension  pillar,  although  the  final  size  is 
highly uncertain and significantly affected by the behavioural response of the private pension 
funds and their members. 

The government possesses an additional tool to off-set unforeseen adverse developments: the 
bulk of the standard general reserve of 0.3% of GDP11  is still untouched, although a cautious 
approach  is  warranted  regarding  its  treatment  as  a  real  buffer  since  historical  evidence 
suggests that the general reserve was eventually spent in the course of the year independently 
from the macro and fiscal developments. 

11 The main function of this reserve is to meet unforeseen expenditures and could be used rather discretionally by 
the Government (the only constraint is that a maximum 40% of the total annual appropriation could be released 
in the first half of the year). 

8

 
 
 
 
                                                            
Table 3: Comparison of key macroeconomic projections 

General government balance  
(% of GDP) 

Government gross debt  
(% of GDP) 

Cyclically-adjusted balance 
(% of GDP) 

Structural balance2 
(% of GDP) 

CP April 2011 
COM AF 2011 
HU 2012 Budget 
COM EDP JAN SWP 
Current COM assessment 
CP April 2011 
COM AF 2011 
HU 2012 Budget 
Current COM assessment 
CP April 2011 
COM AF 2011  
HU 2012 Budget 
Current COM assessment 1 

CP April 2011 
COM AF 2011 
HU 2012 Budget 
Current COM assessment  

2010 
-4.2 
-4.2 
-4.2 
-4.2 
-4.2 
80.2 
81.3 
81.3 
81.3 
-2.1 
-2.4 
n.a. 
-2.3 

-3.1 
-3.8 
n.a. 
-3.6 

cf. IMF, Article IV Staff Report, January 2012 
General government balance (% of GDP) 

cf. Consensus Economics, January 2012 
General government balance (% of GDP) 
cf. OECD, EO No. 90, November 2011 

2011 
2.0 
3.6 
3.9 
3.6 
4.1 
75.5 
75.9 
73.9 
80.3 
3.5 
4.8 
n.a. 
5.6 

-4.2 
-5.0 
n.a. 
-4.2 

3.5 

2012 
-2.5 
-2.8 
-2.5 
-2¾% 
-3.0 
72.1 
76.5 
71.8 
76.2 
-1.6 
-1.8 
n.a. 
-1.6 

-2.5 
-2.6 
n.a. 
-2.3 

2013 
-2.2 
-3.7 
-2.2 
-3¼ 
-3.6 
69.7 
76.7 
n.a. 
76.4 
-1.8 
-3.2 
n.a. 
-2.7 

-1.8 
-3.2 
n.a. 
-2.7 

-3.93 

-4.13 

n.a. 

-3.4 

-3.0 

4.0 

General government balance (% of GDP) 
Notes: 
1 Commission services' estimates based on commonly agreed methodology.  
2  Cyclically-adjusted  balance  excluding  one-off  and  other  temporary  measures.  One-off  and  other  temporary  measures 
according to the Commission services' assessment are 1.3% of GDP in 2010, deficit-reducing; 9.5% of GDP in 2011, deficit-
reducing; 0.7% of GDP in 2012, deficit-reducing; 0.0% in 2013. The structural balance was -2.2% of GDP in 2009, according 
to the Commission services estimation. 
3 The IMF forecasts for both 2012 and 2013 include ¾% of GDP extraordinary budgetary reserves (if unspent, the deficit will 
be reduced accordingly).    
Source:  Convergence  programme  update  (CP);  Commission  services’  autumn  2011  economic  forecasts  (COM  AF);  2012 
budget  bill  (adopted  in  December  2011);  Commission  services'  EDP  Staff  Working  Document  January  (published  on  11 
January, COM EDP JAN SWP); 

-3.4 

-3.3 

2.3. 

Deficit projections for 2013 

Updating the deficit forecast for 2013 contained in the January 2012 SWP accompanying the 
Commission  recommendation  for  a  Council  decision  under  Article  126(8)  of  the  Treaty  of 
3¼% of GDP on the basis of recent information, the deficit would be at 3.6% of GDP. The 
higher deficit number is mainly due to a base effect from permanent deficit increasing factors 
of 0.4% of GDP already having an impact in 2012 (such as lower tax revenues mainly due to 
the  lower  growth  forecast  in  2012  and  foreseen  expenditure  slippages  related  to  the  drug 
subsidies). Moreover, the recent increase of the yields on the government securities increases 
interest expenditures more in 2013 than in 2012 by 0.1% of GDP. These effects are expected 
to be only partly offset by the lower than earlier expected transfer to the central bank in 2013 

9

 
 
 
 
 
 
 
compensating  for  its  loss12  and  the  slightly  faster  recovery  than  earlier  projected,  altogether 
decreasing the deficit by ¼% of GDP.  

Having incorporated all these elements, the budget deficit is still expected to increase in 2013 
on the previous year, but now from 3% of GDP  to  3.6% of GDP. This mainly reflects the 
phasing out of the sectoral levies of close to 0.9% of GDP in  2013, the  higher debt service 
expenditures  of  ½%  of  GDP  as  well  as  the  tightening  of  the  tax  base  of  the  PIT  with  a 
budgetary effect of 0.3% of GDP. 

These  deficit-increasing  effects  are  expected  to  be  partly  counterbalanced  by  the  further 
implementation of the Széll Kálmán structural reform programme resulting in savings of over 
0.4% of GDP, additional savings of ¼% of GDP due to the nominal freezing of the wages in 
the public sector as well as lower expenditures of 0.15% of GDP in light of the less generous 
wage compensation in the private sector. In addition, the lower direct cost of the agreement 
with  the  banking  sector  in  2013  compared  to  2012  as  well  as  the  economic  recovery  (also 
partly related to the agreement with the banks) will altogether decrease the deficit by around 
½% of GDP. All in all, compared to 2012, the deficit increasing effects of 1¾% of GDP are 
foreseen only partly offset by the deficit improving developments of 1¼% of GDP in 2013. 

The government published on 21 February 2012 further consolidation plans. The measures of 
0.4%  of  GDP  include  further  savings  in  pharmaceutical  subsidies,  lower  subsidies  for  the 
Budapest  Public  Transport  Company  in  2013,  the  introduction  of  the  electronic  road  toll 
system from the middle of 2013 as well as further across-the-board expenditure reduction at 
the line ministries. However, for the time being these measures cannot be incorporated in the 
forecast  since  they  have  not  been  sufficiently  substantiated  yet.  In  addition,  the  quality of a 
part of these measures (such as the across-the-board  savings  at  the  line  ministries)  and  thus 
the  sustainability  of  the  potential  saving  is  questionable.  According  to  the  Commission 
services' estimation, the maximum deficit-improving effect of these measures might be 0.3% 
of  GDP  in  2013,  taking  also  into  account  the  second-round  effects  (there  might  also  be  a 
negligible  effect  in  2012).  But  even  if  these  measures  were  taken  at  face  value  the 
Commission services deficit forecast would still exceed the reference value in 2013 based on 
the  updated  budgetary  forecast.  Similarly,  there  are  elements  in  the  Széll  Kálmán  plan  that 
cannot  be  taken  into  account  for  the  time  being  as  some  of  the  measures  are  not  yet 
sufficiently specified. 13 

2.4. 

Debt developments 

Taking  into  account  the  recent  forecast  and  assuming  a  stable  HUF/EUR  exchange  rate  of 
around 295 and that one-third of the transferred pension assets will be sold in 2012, the gross 
public debt is expected to decrease to around 76.5% of GDP in 2012 from the 80.3% of GDP 
in  2011.  In  2013,  the  debt  ratio  is  expected  to  increase  again  slightly  based  on  the  current 
deficit outlook. 

12 The lower projected 2012 loss of the central bank is explained by the weaker than earlier expected exchange 
rate, which is anticipated to result in higher realised gains in foreign exchange transactions. 
13 In 2013, savings related to the Széll Kálmán structural reform programme are less by around 0.8% of GDP 
according to the Commission services than projected by the government. This is the result of a gap of 0.2% of 
GDP already present in 2012 and a further difference of around 0.6% of GDP related to the additional saving 
plans, which have not been substantiated by detailed measures yet. 

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2.5. 

Future budgetary policies 

The updated deficit projection for this year of 3% of GDP exceeds the government's deficit 
target  of  2.5%  of  GDP,  according  to  the  2011  update  of  the  Convergence  Programme,  the 
budget  as  well  as  the  economic  stability  law.  Thus  reaching  this  target  would  require  some 
additional adjustment of ½% of GDP on top of the already expected 1.9% of GDP. 

Currently, the expected outcome in 2013 of 3.6% of GDP suggests that at least ¾% of GDP 
are  needed  to  ensure  that  the  deficit  is  below  the  3%  of  GDP  Treaty  reference  value  and 
another ¾% of GDP would be required to meet the deficit target of 2.2% of GDP included in 
the  latest  update  of  the  Convergence  Programme.  Assuming  that  the  above  mentioned 
measures of ½% of GDP are already taken in 2012, the additional reduction would be 1% of 
GDP.  Based  on  current  calculations,  achieving  the  government's  deficit  target  of  2.2%  of 
GDP would imply a fiscal effort of ½% of GDP in 2013 compared to the 2.5% of GDP target 
and would result in a structural deficit of 1¼% of GDP, slightly below the current MTO of 
1½% of GDP. It would also ensure a decreasing gross public debt in 2013. 

Possible  expenditure  reductions  could  be  partly  based  on  the  appropriate  substantiation  and 
implementation of those reforms foreseen in the context of the Széll Kálmán structural reform 
programme that have not yet been sufficiently specified. So far this concerns 0.1% of GDP in 
possible  measures  in  2012  and  0.8%  in  2013.  Moreover,  a  further  specification  of  already 
announced  savings  of  0.4%  of  GDP  cuts  could  be  foreseen,  assuming  that  they  are  of  a 
structural nature to ensure a lasting effect. In addition, further measures could be identified. In 
particular, they could include the means-testing of the universal family tax allowance and/or 
universal  family  benefits.  On  the  revenue  side,  the  introduction  of  a  value  based  residential 
property  tax  scheme  and  the  enhancement  of  the  progressivity  of  the  personal  tax  system 
could be considered.      

The  authorities  introduced  the  key  elements  of  a  new  fiscal  governance  framework  in  the 
Constitution (in effect as of 1 January 2012). Most notably, a nominal debt ceiling was set at 
50%  of  GDP  and  a  veto  right  over  the  budget  was  granted  to  a  rearranged  Fiscal  Council 
(FC).  A  follow-up  legislation  to  establish  the  new  operational  numerical  rules  both  at  the 
central and the local level as well as the stipulation on the governing arrangements of the FC 
was adopted late 2011 in a 'cardinal law'. The adopted new annual numerical rules appear to 
focus  too  much  on  the  annual  budgetary  cycle  and  are  not  conducive  to  medium-term 
budgetary planning. The adequate operation of the Fiscal Council, commensurate to its strong 
veto  right,  is  not  yet  ensured  (e.g.  through  the  preparation  of  regular  macro-fiscal  baseline 
projections).  Consequently,  it  seems  necessary  that  the  operationalisation  of  the  key 
constitutional fiscal rules is carried out in a way as recommended by the Council in July 2011: 
the  budget  process  is  embedded  into  a  binding  medium-term  framework  and  the  analytical 
remit of the Fiscal Council is broadened and the body is appropriately reinforced. 

Enhanced  surveillance  under  the  EDP  will  require  regular  and  timely  monitoring  of  the 
progress  made  in  the  implementation  of  the  fiscal  consolidation  strategy.  The  Commission 
and the Council shall monitor the implementation of action taken by Hungary in response to 
this  recommendation,  in  accordance  with  Article  10  (a)  of  Regulation  (EU)  No  1467/97, 
including  on  the  basis  of  the  continued  submission  of  regular  progress  reports  by  the 
authorities and the information contained in a separate chapter of the Hungarian convergence 
programme updates. 

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