The building of the NBH in Budapest – Photo: wikimedia

Matolcsy says rethink on deficit spending needed to restore balance

The way in which Hungary narrows the gap with more advanced economies requires a rethink so that not only is growth the aim but sustainable growth is too, Gyorgy Matolcsy, the governor of Hungary's central bank (NBH) wrote in an op-ed published on Monday.

Balance in all areas is necessary when it comes to narrowing the gap, but currently financial balance is most germane to this goal.

The crisis, the subsequent crisis management and recovery have been accompanied by rapid deterioration in all the balance indicators, Matolcsy said.

The high budget and current account deficits are such that Hungary is again trapped in a twin deficit, one that it successfully emerged from after 2010. But now the associated risks are greater, he said.

With a budget deficit possibly around 8 percent of GDP and a public debt ratio of 80 percent of GDP, coupled with deteriorating exchange rates, the current account situation, which had been positive until recently, is worsening, Matolcsy added.

Higher inflation makes matters worse, the governor said. Global economic developments are doubtless behind the high rate, but domestic budget deficit spending outpacing productivity and competitiveness improvements are also to blame, he added.

Matolcsy said addressing these problems and restoring balance were urgent tasks. Measures that have improved living standards can be maintained, but public investments based on deficit spending which hamper competitiveness must be ditched or delayed, Matolcsy argued. The public debt must be brought down faster, the current account restored to health, and a recovery is needed in inflation expectations, he added.

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