"The European Commission has on Wednesday voiced two interesting criticism about Hungary in its assessment of the government's Convergence Programme. One of these was in respect of 13th month bonus payments and the other regarded some deficiency in data provisioning.The EC report argues that the February 2007 agreement with public sector employees, and in particular bringing forward half of the regular 13th month bonus payment into 2007, is neutral to the ESA deficit.
“Nevertheless, the agreement would ceteris paribus lead to higher pension expenditure (by 0.05% of GDP in 2007 and close to 0.1% of GDP in 2008) reflecting the Swiss indexation method (based 50% on inflation and 50% on net nominal wages)," the EC said.
At the beginning of the year, the government - on the basis of the expected macro path - raised pensions by 4%, but this looks almost certain to be insufficient, not only because of the aforementioned bonus payment, but also due to higher-than-expected inflation.
“[...] the increased inflation projections from 6.2% to 7% in 2007 are expected to raise pension expenditure in the current year by around 0.2 percentage point of GDP."
In May the Commission penciled in 7.5% inflation for this year.
The combined impact of the two factors could up government expenditure by 0.25-0.3% or HUF 60-70 billion.
The report, however, also refers to a positive impact on the 2007 budget due to the decreasing yields on the Hungarian financial market since early November 2006, which will lower the debt service by 0.3% of GDP compared to plan.
“[...] there were also other provisions in the (aforementioned) agreement that could affect the budgetary outcomes from 2008 onwards and thus constitute a new risk factor. In particular, this concerns the promise that "public sector wages should maintain their real value in 2008". If the conditional half-a-month extra bonus were to be paid out in the first months of 2008 (which is subject to good budgetary performance), this would result in an additional 0.2% of GDP wage expenditure," the EC said.
It added that for 2009, there would be “substantial pressures for higher wages in the public sector both due to the phasing out of the two-year freeze and as a result of the public wage agreement."
The EC has also voiced subtle criticism about the fact that the government failed to explained in the April update of the Convergence Programme why both the revenue and expenditure ratios have increased in 2006.
“The revenue ratio increased by 1.5 percentage point of GDP to 43.7% of GDP in 2006 and the expenditure ratio by 2.9 percentage point to 52.9% of GDP," the EC said, while noting that “both expenditure and revenue ratios are considerably higher than foreseen in the December 2006 update of the Convergence Programme".
While it said this was partly explained by somewhat higher expenditure financed by EU transfers, and a lower-than-projected nominal GDP, it added that “a substantial part of the increase in the residual categories of other revenue and other expenditure is not explained in the report; it is not clear whether it corresponds to actual budgetary developments, or to a statistical issue such as an incomplete consolidation of flows among government units in connection with institutional changes."
The EC's no-policy-change deficit forecast for 2008 is 4.9% of GDP, while the government projects a gap of 4.3%. The EU executive said the distance between two figures indicated “the need for further action by the Hungarian authorities."
“The draft budget for 2008, which should be presented to Parliament by 30 September 2007, should set out the measures supporting the target and possibly over-achieve it, building on a better-than-targeted result also in 2007."
“Beyond 2008, the correction of the excessive deficit by 2009 on a sustainable basis hinges on a rigorous implementation of wide-ranging structural reform measures, especially since wage and other expenditure freezes will have come to an end.
In particular, in line with the announced reform agenda of the Government, this should include:
-further steps towards fully means-tested price subsidy systems (a nominal cut of 0.6% of GDP is planned in cumulative terms in 2007 and 2008);
-a continued streamlining of the institutional setup of the public administration to underpin the budgetary freezes of 0.6% of GDP in 2007;
-overhaul of the financial allocation mechanism in the health-care system; and
-the review of the parameters of the pension system to achieve more than the planned savings of around 0.1% of GDP in 2009"
Source:
Portfolio Online Financial Journal
14.06.2007