Abstract
The Article IV Consultation highlights the financial system risks that have increased reflecting both the global financial market turbulence and continued rapid credit growth in Hungary. With most new borrowing in foreign currency, the private sector’s net foreign currency liabilities increased. Monetary policy has been appropriately tightened, and the elimination of the exchange rate band has removed a potential conflict between monetary policy objectives. Executive Directors called for enhanced collaboration with foreign supervisory authorities given Hungarian banks’ close links with financial institutions abroad.
1. This supplement reports on key economic developments since the staff report was finalized on July 29, 2008. The new information does not alter the thrust of the staff appraisal.
2. The government has proposed a package of tax measures, which—if enacted—would likely increase the fiscal deficit (see text table). While the reduction in the tax burden—especially the lowering of taxes on labor—would be welcome, the lack of specific offsets on the expenditure side is inconsistent with staff advice, as it could increase the fiscal deficit by up to ½ percentage point of GDP. Thus, if the tax package is enacted, it could take away the fiscal consolidation originally envisaged for 2009 that staff see as necessary to reduce vulnerabilities. Prospects for enactment are uncertain, however, because the government does not have a majority in parliament.
Hungary: Impact of Proposed Tax Package on Fiscal Balance, 2009
(In percent of GDP)
Hungary: Impact of Proposed Tax Package on Fiscal Balance, 2009
(In percent of GDP)
| Revenue losses | 0.9 | Revenue increases and spending cuts | 0.9 | ||
| Social security contributions | 0.5 | Taxes on fringe benefits | 0.2 | ||
| Personal income tax | 0.3 | Excise taxes | 0.1 | ||
| Corporate income tax (net) | 0.1 | Contributions to rehabilitation fund | 0.1 | ||
| Unspecified expenditure cuts | 0.5 | ||||
Hungary: Impact of Proposed Tax Package on Fiscal Balance, 2009
(In percent of GDP)
| Revenue losses | 0.9 | Revenue increases and spending cuts | 0.9 | ||
| Social security contributions | 0.5 | Taxes on fringe benefits | 0.2 | ||
| Personal income tax | 0.3 | Excise taxes | 0.1 | ||
| Corporate income tax (net) | 0.1 | Contributions to rehabilitation fund | 0.1 | ||
| Unspecified expenditure cuts | 0.5 | ||||
3. Otherwise, economic developments have been largely as anticipated in the staff report. GDP growth accelerated from 1 percent year-on-year in 2008Q1 to 2 percent year-on-year in 2008Q2, reflecting primarily an increase in private consumption growth. With both employment and labor force participation falling, the unemployment rate has been broadly stable. CPI inflation in July was unchanged at 6¾ percent, and private sector wage growth (excluding bonuses) in June was 9 percent, the same as in April. The central bank left the policy interest rate unchanged in August. Also, the government and the central bank agreed to keep the inflation target at 3 percent (with a +/- 1 percent tolerance band) for the next three years (or until ERM2 entry).