Escaping interest is a huge burden
In the past few weeks, we have dealt with the fact that, in parallel with the increase in interest rates, the interest expenditure in 2023-24 represents a significant plus for the budget. According to the government’s estimates, interest expenses in the budget will jump from 2.8 percent last year to 3.8 percent of GDP this year, and then this will rise further to 4.1 percent in 2024.
Nominally, this means that in 2022 the amount, which is still close to 1,900 billion forints, will jump by 1,000 billion forints this year, and then next year, after a further increase of 500 billion, it may peak near 3,500 billion.
This is the optimal case, because the data of the four months of the year so far show that even this year’s goal may be in jeopardy. By the end of April, the budget paid HUF 756.8 billion for debt service, which is more than double what was seen in the same period last year. That is there is already a real danger that the 2023 budget will not be met, and there are additional risks regarding 2024.
For example, at the beginning of the year, Central Bank Governor György Matolcsy projected an interest expenditure in proportion to GDP of 4.6 percent, which means that there could be a slippage of even 0.5 percent of GDP compared to next year’s plans. But as we have seen, even the 4.1 percent government plan would cause a significant increase in spending.
According to the 2024 budget bill submitted to the parliament, the amount of gross interest expenses may be HUF 3,144.8 billion, which can be partially offset by interest income of nearly HUF 400 billion. These numbers should be treated with caution because
a year ago, when the 2023 budget was adopted, only HUF 1,400 billion in interest expenses were included in it, while now we are happy if we can get away with double this this year.
There are also interesting points in the bill regarding the composition of interest expenses planned for next year, one of the most important being that
next year may be the first time that the budget pays the population the largest amount in interest.
According to the proposal, the budget can pay HUF 1,228.6 billion in interest on retail bonds and HUF 1,198.1 billion on HUF bonds sold on the wholesale market in 2024. The former amount may more than double compared to the 2023 goals, while the latter amount would practically mean stagnation.
In light of the extremely high state interest expenses, the high rate of household financing can be called positive, so the interest income migrates to the population. This is partly the goal of the development of the residential government securities market over the last ten years, so that as much interest expenses as possible remain at home.
Another burden is the loss of the central bank
An indirect consequence of skyrocketing interest rates is that the MNB had a loss of HUF 402 billion last year. For this reason, the government does not have to recapitalize the central bank for the time being, but the loss in 2023 could be several times that amount. Thus, in 2024, the budget may take on an additional burden of hundreds of billions of forints.
Last year, mainly the profit recorded at the forint exchange rate saved the MNB from an even bigger loss, which may be much smaller in 2023 based on the exchange rate of the foreign exchange reserve. In addition, within the central bank’s own capital, the so-called equalization reserve of the forint exchange rate may practically drop to zero from last year’s 750 billion forints. In other words, together with the loss, the equity capital of the MNB may decrease by up to HUF 2,000 billion.
Even calculated on the basis of the amendment to the law passed at the beginning of the year, this could mean an extra burden of HUF 300-400 billion per year on the budget over five years.
The problem is that the draft budget does not take into account this burden at all, that is, an item representing even 0.5 percent of GDP may appear in the budget, which may eat up most of the room for maneuver.
All in all, the jump in interest expenses and the mandatory reimbursement of the central bank’s loss could mean an expenditure corresponding to 4.5-5 percent of GDP in the budget, while the government wants to reduce the total deficit below 3 percent. This means that a significant primary surplus should be achieved in the budget, which has hardly been the case in Hungary in recent decades.
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