Árpád Kovács: Public debt may already decrease this year

English2021. máj. 1.Anna Szabó

The public debt-to-GDP ratio is expected to decrease from the level at the end of 2020 by the end of this year, Árpád Kovács said in an interview with Növekedés.hu. According to the Chairman of the Fiscal Council, if the performance in the second quarter of this year is above ten percent, it can offset last year's decline. Investments that generate development will also play a major role in this.

What were the key changes that made the amendment of this year’s budget necessary? 

The 2021 budget was made at a time last year when the country had successfully contained the first wave of the epidemic. However, warning about the need for flexible adjustment, the Fiscal Council pointed out during the legislative process already that the potential resurgence of the coronavirus epidemic and the situation that might evolve may lead to significantly higher crisis management costs, which will have an impact on both public debt and the state deficit. Unfortunately, that's exactly what we have seen happening since then. 

The current amendment to the Budget Act was necessitated firstly by the changed circumstances in 2020, secondly by measures aimed to protect public health and to support the economy, and thirdly by changes in the framework of the EU budget for the period 202I-2027.

The new bill counts on 4.3 percent economic growth for 2021 instead of the previously planned 4.8 percent. As a result of the measures taken to help economic recovery and epidemic control, the deficit target will change from 2.9 percent to 7.5 percent of GDP. In line with the expected economic growth and the evolution of the state's liquid assets,

public debt is expected to fall from 80.4 percent of GDP at the end of last year to 79.9 percent by the end of this year, in line with the provisions of the Basic Law of Hungary.

In your opinion, what are the biggest risks to economic growth this year? 

In assessing the credibility and enforceability of the draft budget bill, the Council considered the exceptional circumstances and the emergency resulting from the ongoing pandemic. We can say that the country, like the whole world, is going through a specific stress test. It depends on the success of virus control and the restart of the economy when we will be able to return to our previous lives. 

The biggest risk is the uncertainty regarding the course of the epidemic.

It all depends on when the restrictions can be lifted in Hungary and also at our economic partners, i.e. when the whole economy, including large companies, small and medium-sized enterprises, especially in the tourism, hospitality and service sectors can “get back on their feet”, and how big the “budget injection” will have to be . If the performance in the second quarter of this year already offsets the deep decline of the same period last year with a good result of over ten percent, and the second half of the year sees a clear and emphatic upward trend resulting from the restart, the risks will most certainly be manageable.

The current amendment raises the deficit target primarily so that the government should have room for manoeuvre to take the necessary health protection and economic restart measures.

It seems the Fiscal Council have been using a more critical tone this year. What is the reason for this? Could it suggest perhaps that in your opinion the cabinet should set a bigger deficit reduction target?

I believe that basically we all agree in the Council that we need to speak as forcefully and with as much emphasis as the situation requires. It was no different now, regarding the case of the transparency of the budget. As it was, in the draft submitted to the Fiscal Council, the government would only include the adjustments in revenue and expenditure appropriations and their impact on the budget deficit that are subject to approval by the Parliament, but not those that result from decisions made by the government in its own competence. 

In addition, we know that there are revenue and expenditure appropriations that are fulfilled “automatically” in line with demographic and other developments, but this time the draft did not contain any estimation regarding these.

The Council was of the opinion that it is important for the National Assembly to have a clear insight into all these, so the government should reveal all revenue and expenditure adjustments, and also the real expected budget deficit, as the public debt and the fulfilment of the public debt rule can only be judged on this basis, and also it will have an impact on next year’s budget. The government has already tried to comply with such proposals, intended to improve clarity and verifiability, in the submitted bill. 

Of course, we will also look into the submitted version and - if necessary - we will respond to the additions and government steps in our comments in the plenary session of the Parliament.

Another proposal from the Council, which is important for next year's deficit path, is to achieve a stronger-than-planned deficit reduction if the economic environment becomes more favourable, creating better conditions for a significant improvement in the budget balance in 2022 and a sustainable reduction in the public debt ratio.

According to a recent report by Moody’s, EU funds could raise domestic GDP growth by 0.3 percentage points in the coming years. How do you see the extent to which EU funds can contribute to growth? 

I would only mention the facts here, emphasizing, of course, that these resources do contribute to growth. However, Hungary's contribution to the EU budget will increase by HUF 164.9 billion in 2021, partly due to the higher-than-expected economic growth of previous years and also because of the additional payment obligation arising from Brexit. 

Thus, compared to the HUF 449.7 billion Hungary paid into the EU budget in 2020, this amount will increase to HUF 615.3 billion in 2021. The revenues from EU programs will amount to HUF 2,159 billion, while the related expenditures will reach HUF 2,933 billion.

In other words, pre-financing from the Hungarian budget is still continuing, although this will most probably be refunded in later years. 

When can we expect to reach pre-crisis levels regarding GDP and the employment rate? 

Most importantly, the Fiscal Council monitors the implementation of the requirements of budget regulations and the improvement of the government budget balance. Since there is no balance without economic growth, we also keep an eye on that. 

As far as we can see, thanks to development-generating investments, in the next two to three years we can return to the path we have been following in recent years, where balance indicators are improving and at the same time economic growth can reach the double of the EU average. Next year may already be a period of closing up on the pre-crisis level and returning to this path, which will, of course, also induce favourable processes in employment.