The fiscal deficit target has been raised: this was always a bridge too far

HUNGARY - In Brief 03 Oct 2023 by Istvan Racz

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This morning, KSH reported a general government deficit ratio of 6.3% of GDP, by EU methodology, for H1 2023. Immediately beforehand, the Finance Ministry announced an increase in this year's annual deficit target to 5.2% of GDP from the previous 3.9%, which was an amended version of the original 3.5% target set for 2023. Surprise, surprise? Not at all. We always said that the original and even the amended deficit target was an almost impossible and certainly unreasonable undertaking, except that it has proven to be useful in keeping rating agencies calm and relatively satisfied with the government's apparent determination to restore fiscal equilibrium. The latter's potentially negative reaction may be certainly the most interesting consequence of this new decision. But otherwise, the new deficit target would be still a full percentage point lower than 2022's actual deficit ratio of 6.2%, which would have been around 8.5-9% of GDP if last February's massive income tax refund and last year's retail gas price subsidies had been accounted for in the 2022 fiscal data, as it would have made sense from the point of view of economic analysis. Against that corrected actual number for 2022, cutting the deficit ratio to just 3.9% of GDP within one year, in a heavily disinflationary environment and without risking a major economic recession, would have been too much to be realistic. By the way, 0.5%-point out of the total 1.3%-point upward correction of the deficit target represents an increase in the government's expected debt costs for the year (4.4% of GDP), and an additional 0.2%-point increase comes from the fact that the government now expects lower nominal GDP than previou...