Elements of fiscal adjustment are appearing here and there

HUNGARY - In Brief 28 Oct 2018 by Istvan Racz

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Following the cutback of maximum advance payments on EU-backed development projects in September, new elements of fiscal restraint appeared, thus far sporadically, in recent weeks. These included:- the discontinuation of a 30% government subsidy on payments into building society schemes, effective immediately on any new contract from mid-October;- the announcement of a roughly 15% reduction of staff in central public administration (ministries and the like), affecting about 3000 employees, from November;- the clarification by the government that an increase in the tax burden on the so far untaxed or lowly taxed non-wage employee compensations (typically up to 5% of total compensations), already part of the approved 2019 budget, will not be subject to negotiations with the trade unions.Apparently, all this has to do with the fact that according to the EU Commission, the government's structural deficit is rising to 3.6% of GDP this year from 3.1% in 2017, and that they expect Hungary to come up with ideas without delay on how this number could be reduced towards the mutually agreed 1.5% medium-term structural deficit target. It is true, of course, that Hungary, as an EU member outside the euro area, should not count on direct negative consequences if it disregarded the problem. But to put it plainly, non-cooperation on fiscal policy on Hungary's part could imply non-cooperation from the EU on development grants to Hungary. In addition, the government needs to please rating agencies as well.Of course, the government would never publicly admit that these measures have anything to do with fiscal restraint, which is a banned expression for them for political reasons. The gov...