Economic Development Minister Marton Nagy hinted that the government would abandon its 3.9% deficit target, but said the government would not increase windfall taxes for banks. His comments did not help the shares of OTP, which extended losses on Friday.
CEE’s leading lender lost 8% of its value in two days after Finance Minister Mihaly Varga suggested in his presentation at the annual meeting of economists that the government would trim interest on subsidised loans and could increase tax levies on banks.
In an interview with financial website Portfolio.hu before closing the conference, Nagy said these measures are not on the agenda, as both would hamper the recovery of credit markets.
He acknowledged that Hungary is now in a crisis management mode as consumption has fallen a lot steeper than expected due to the fall in real wages, leading to a decline in VAT revenues.
"This is a particular problem because the Hungarian economy relies predominantly on consumption taxes rather than taxes from income," he said. Hungarians pay a flat 16% in personal income taxes but the highest VAT among OECD countries, 27%,
According to Nagy, the budget cannot be expected to run the same deficit trajectory as previously projected due to the sharper-than-expected fall in consumption and a lack of EU funding. Sticking to the goals would sacrifice growth, he added. His words confirm that the government is letting go of its targets. The budget gap in the first eight months widened to 97% of the full-year target. The shortfall of HUF700bn (€1.8bn) in VAT revenues from the target is a major contributor to the dismal state of public finances.
Nagy said the government is examining the developments of fuel prices and will intervene if necessary if it finds factors that unreasonably contribute to price hikes. Hungary introduced a fuel price cap in November 2021, six months before the elections, at HUF480 per litre. The scheme was phased out after wide-scale shortages threatened the security of supply in December 2022. At present, Hungarians pay the highest price for fuel due to weaker forint and high taxes.
Nagy, who was the last speaker of the two-day forum, said 2023 will be the year of fighting inflation and next year will be about producing growth, he added. Hungary managed to escape from the energy trap as the country’s energy imports surged from €7bn in 2021 to €17bn last year, which will be around €8.5bn-9bn in 2023. Energy subsidies for households are expected to drop from 1.8% of GDP in 2023 to 1.1% next year, 0.1pp over the 2022 figure.
Nagy defended government measures that helped avoid the dry-up of lending by offering subsidised loans to businesses, which alone added 1.5pp to growth, allowing Hungary possibly to avoid recession.
In the debate focusing on who is responsible for the EU record inflation in Hungary, Nagy did not take sides in the ongoing spar between the government and central bank, saying that inflation was unavoidable due to the structure of the economy and Hungary's floating exchange rate.
Nevertheless, he took a jab at the central bank, saying that it endangers economic rebound by shooting for the highest real interest rate in the region.
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