Hungary will have a budget deficit of 2.3 percent this year, 2.1 percent in 2016 and 2.0 percent in 2017, the report said. The country’s public debt will amount to 75.8 percent of GDP this year, 74.5 percent in 2016 and 72.6 percent in 2017, according to the EC forecast.
Private consumption and external demand are both expected to drive growth over the forecast horizon, the EC said, noting the positive impact on household spending power of low inflation, high nominal wage growth, compensation from lenders, a planned 1 percentage point cut in the rate of personal income tax and strong labour market performance. The EC puts export growth at 7.7 percent in 2016 and 8.0 percent in 2017.
Hungary’s unemployment rate is expected to fall close to 6 percent by 2017, although the EC noted that employment gains are due not only to private sector activity but an expansion of state-sponsored fostered work programmes.
The EC said overall risks to the growth outlook were on the downside. It acknowledged the possible impact of an escalation of the Volkswagen crisis and the slowdown in China and other emerging market economies, but it said steps to wean small- and medium-sized enterprises off subsidised loans could improve lending conditions and improve growth, and the recent conversion of foreign-exchange retail loans into forints might raise households’ propensity to dip into their savings, boosting consumption.
The arrival of asylum seekers does not fundamentally affect the country’s macroeconomic outlook, the EC added.
Robust tax revenue and lower interest spending had improved Hungary’s fiscal outlook. The favourable impact of these factors was expected to be only partly offset by extra spending, such as that on managing the wave of asylum seekers, and a shortfall in revenue from sectoral taxes pending the result of EC investigations.
Addressing fiscal risks, the EC said the net cost of EU-funded projects could be higher than planned in 2015 and 2016, and healthcare and education budgets were tight. But revenue from the planned sale of state-owned farmland could “well exceed” the target for 2016, and some revenue could arrive yet this year.
The Ministry of National Economy welcomed the report, saying it supported the government’s position that reforms are working. The growth rate projected by the Commission for Hungary this year is better than the earlier projection of 2.8 percent growth and it is supported by forecasts released by other international organisations, too, the ministry said.
The EC’s projection of Hungary’s budget deficit was also better than expected, at 2.3 percent this year and 2.1 percent next year, after projecting 2.5 percent in May. It also acknowledged that Hungary’s public debt is falling, the ministry added.