The decade ahead will not be easy, although hopefully it will not bring a global economic crisis like the 1920s – Minister of Finance Mihály Varga began his presentation on the second day of the 60th Traveling Economist Assembly in Szeged. After describing the global economic risks of the decade and the next one or two, he turned to Hungary’s situation – noting that the country’s main vulnerability will be related to financing – and although he repeatedly mentioned that the government is optimistic, the figures he presented for the presentations were very they paint a devastating picture for the remaining months of this year, and even for the entire year of 2023. And he didn’t encourage the companies facing ever higher energy prices and asking for state support one after the other with too much help.
According to the Minister of Finance, since governments worldwide are struggling with serious public budget deficits and increased public debts due to the handling of the covid crisis, and in addition, the central bank’s balance sheet totals have grown enormously due to the handling of the crisis, there is therefore very little room for maneuver that due to the Russo-Ukrainian war, especially in Europe, the energy supply to meet the growing financing and support needs due to its transformation. Among the possible crisis management solutions, Hungary chose medium-strength support programs in addition to strong budget savings – and here again listed the measures announced in last Saturday’s government briefing. But this room for maneuver is also narrowed by the fact that the government has disputes with several major economic players regarding financing issues.
Among these, Mihály Varga mentioned that due to Hungary’s rejection of the global minimum tax initially initiated by the Biden administration with a tax rate of 21 percent and later formulated within the framework of the OECD, which was moderated to 15 percent, the United States canceled the double taxation agreement between the two countries that existed for several decades convention.
We are currently working to prepare for the unplanned side effects of a unilateral US move, presumably by US government officials.
– noted the Minister of Finance. He cited FACTA as an example. (This is the abbreviation of the Foreign Account Tax Compliance Act in the USA. In order to promote international tax compliance and mutual data exchange, an agreement was reached between the two countries, on the basis of which Act XIX of 2014 was created – amendment of the so-called FATCA Act and related legislation According to the FATCA Act, from July 1, 2014, all Hungarian financial institutions must use a customer identification system that provides assistance in determining the involvement of customers and applicable tax forms, and they must clarify their existing clients from the point of view of FATCA involvement, and from 2015, they must submit an annual report to the national tax authority about FATCA-affected clients. Ed.)
The other significant dispute between the European Union and the government is the dispute over the rule of law, which has led to the decision to withhold 20 percent of the 37.26 billion forints tied to the partnership agreement in the seven-year budget cycle until the government verifiably fulfills its commitments to the EU , and the EU contribution to the use of 5.81 billion euros of the recovery fund is missing. We are looking forward to an interesting legislative period – noted Mihály Varga. Adding that the government expects that the disputes will be settled, and on November 19, a favorable decision will be made for us on the availability of funds.
According to Mihály Varga, there are two serious vulnerabilities to be reckoned with in Europe in the next period: food production and the price of energy carriers. Since the country has a strong agriculture and food industry, it represents a smaller risk in our case, and according to the minister, they are confident that we can also influence prices. Dealing with energy dependence is more difficult, the rise in prices this year caused an abnormal situation, as no business can prepare for a tenfold increase in the price of a product. According to the Minister of Finance, the development of current account balances in all of Europe is beginning to take a dangerous course, which will be completely tipped by energy bills. Compared to 2019, it also increased significantly in Hungary:
- 5059 billion instead of 570 billion forints for natural gas,
- 1,479 billion instead of 1,008 billion forints for crude oil,
- while for electricity instead of HUF 201 billion, HUF 1,559 billion will have to be paid, according to the PM’s estimate.
They do not expect energy to be much cheaper, which is why any energy efficiency investment and energy saving opportunity will be emphasized in the next period. Here he mentioned that while in Austria the proportion of insulated family houses is 80 percent, in Hungary it is only 20 percent. He noted that cheap energy did not encourage anyone to save. However, he did not mention any new measures beyond the residential and corporate support programs announced so far. However, he later mentioned that the Paks expansion will be a key element of medium-term energy efficiency and energy security, according to the government’s point of view.
In addition to increasing energy efficiency, encouraging household savings also reduces the pressure on consumer prices, which is why the government will soon announce a decision on new government bonds, said Mihály Varga. Meanwhile, in his presentation, he flashed a graph made on the basis of PM calculations related to the development of inflation, from which it can be read that
this year, inflation may be above 20 percent at the end of the year, which may peak at 22 percent in the first quarter of 2023, but will only begin to decrease significantly sometime in the middle of the year.
Speaking about the development of the public budget deficit, Mihály Varga said that the government is still planning a 4.9 percent deficit by the end of the year, and is sticking to it, regardless of the fact that due to negotiations with Eurostat, the compensation for the additional 740 billion cubic meters of natural gas – which is otherwise covered by a syndicated bank loan cabinet – must still be included in the deficit.
Therefore, in EU statistics, the 2022 public budget deficit as a percentage of GDP will be 6.1 percent.
Although according to the government’s point of view, this is included in the balance sheet as an asset.
It is clear that the 2023 budget must be touched upon at the end of the year, because when it was adopted, the government expected a completely different inflation trajectory, and it is difficult to plan for growth for that year, Mihály Varga stated. Adding that it is also necessary to correct the current balance of payments. According to his words, the government expects that the whole of 2023 will be a difficult period.
This was made understandable by the graph he showed, as it clearly showed that the economy will be in recession in the first three quarters, and growth is expected only in the last quarter.
He also reported that, according to the government’s expectation, the deficit of the public finances may fall below 3 percent after 2024 at the earliest. And only then does he see an opportunity for another multi-year tax reduction cycle to begin.
The close cooperation of fiscal and monetary policy remains a priority – stressed Mihály Varga in conclusion. Adding that he hopes that, thanks to this, the Hungarian economic policy can be navigated back to a state of balance after a very difficult year and a half.
(Cover photo: Mihály Varga on December 22, 2020. Photo: Attila Trenka / Index)