The deficit of the year 2021 is neither historical nor caused by money squandering... In connection with the 2021 Hungarian budget deficit, some articles spoke of a historic deficit and money squandering... In the following, we review the six most important mistakes that are usually made in connection with last year's deficit. Analysis by Géza Sebestyén, associate professor of the Department of Finance at the Corvinus University of Budapest.

1. The reason for the deficit was excessive government spending.

Government spending in the quarters of 2021 was 11-26 percent higher than in the corresponding periods of the year of peace two years earlier... In the first quarter of 2006, the level of spending was 34 percent higher than two years earlier. 35 percent in the fourth quarter of 2020. However, the biggest growth in the last 20 years far exceeded even that.

In the fourth quarter of 2002, the value of public finance expenditure was 47 percent higher than in the last quarter of 2000... the deficit in 2021 was primarily caused not by the growth of the expenditure side, but by the weakness of the income side. The coronavirus had a negative impact on economic performance and employment indicators all over the world. And this reduced the states' tax revenues... In other words, the main reason for the budget deficit must be found in the epidemic and the resulting loss of state revenues.

2. There was a shortage because the money was spent badly.

The previous point clearly shows that this statement is false. The main reason for the shortfall was not spending, but the fact that a part of the income became a fog.

In any case, this statement shows serious ignorance. The lack of budget results from the difference between expenses and income. If a state budget has revenues (and of course they always do), then the level of expenditures is always higher, typically much higher, than the deficit itself... In other words, it is a meaningless question to ask what the deficit was spent on. It is only possible to examine what the budget's expenses were spent on as a whole.

3. Hungary has never had such a shortage.

In 2021, the general government deficit relative to GDP was around 7.3-7.4 percent. The budget deficit of 8.0 percent was even higher than last year. Of course, these values ​​are not surprising in the period of the coronavirus. However, it was much more surprising when, between 2002 and 2006, our country accumulated a similar or even larger negative balance every year, because in those years, not only was there no pandemic, but the world economy was booming and peaking...

...The deficit in 2021 is therefore not only not historic, but it would not even have a podium finish in the last 20 years.

4. The deficit is also outstanding in international terms.

COVID had a similarly devastating effect on the budgets of all countries, as it did on the Hungarian one. Many states survived the 2020-2021 period with much worse indicators than ours. In contrast to the domestic deficit of 8.0 and then 7.3-7.4 percent, Belgium has 9.1 and 8.1 percent, France 9.1 and 8.0 percent, Greece 10.1 and 9.6 percent, Iceland 8, 6 and 11.6 percent, Italy 9.6 and 9.4 percent, Spain 11.0 and 8.1 percent, the United Kingdom 12.9 and 9.1 percent, the USA almost unbelievable 15.4 and 12, It reached a negative balance of 5 percent in these two years. The Hungarian budget deficit in both 2020 and 2021 was lower than the OECD average.

5. A smaller deficit would have been better.

The previous point already suggests that the governments of the world probably did not accidentally let go of the reins in both 2020 and 2021. That is, a high deficit was not necessarily negative news in these years. How this is so, it is not difficult to see even logically. A smaller deficit could have been achieved in two ways, by increasing revenues or by reducing expenditures.

The first would essentially have meant a tax increase, which would have resulted in massive corporate and private bankruptcies in the economy hit by the epidemic.

The second option would have led to the same result through the reduction of subsidies and benefits. In this case, we could have renounced the positive effect of job protection and tax cuts, pensions and salaries of state employees would have had to be reduced.

The budget deficit plays a significant role in the fact that, in an almost unique way, more people are working in our country today than before the outbreak of COVID, and that family incomes have increased despite the crisis. A smaller deficit would have had a serious, even catastrophic, negative impact on both the economy and society.

We Hungarians know not only based on rational arguments that it is not a good idea to cut corners during a crisis. During the 2008-09 crisis, we experienced the devastating effect of a government trying to reduce the public budget deficit during a recession.

6. We have all become poorer because of the shortage.

The falsity of this statement essentially follows directly from the above. The lack was not a cause, but a consequence. A consequence of COVID.

This is why we became citizens, and the Hungarian and every other economy is also poorer. Masses of people have lost or could have lost their jobs (in the absence of government measures) due to closures and shutdowns. The income of a significant part of the workers would have decreased. The planned revenues of companies turned into fog overnight. We all became poorer as soon as the first person caught the coronavirus. The public budget deficit is the numerical value of this loss.

The government had two options. Either it leaves the losses at the level of the private economy, i.e. it does not introduce a credit moratorium, it does not protect jobs, it does not reduce taxes and contributions, or it takes over and raises the costs to the state level.

In the first case, the above losses would have occurred at the individual and corporate level. Where it is most difficult to bear. After all, it is not only the loss of income that is a problem here, but also the fact that in such a situation the given actor does not receive much bridging funds. Which bank would give a loan to an unemployed person during a crisis?

The second version is clearly a better solution. Jobs are preserved, companies can continue to operate, and the liquidity missing due to the crisis can be easily financed, since the state is a good debtor and is creditworthy even in times of crisis (at least much more so than private individuals).

Summary

The reasons for the budget deficits in 2020-21 should not be found in public spending, but in the economic destruction of the coronavirus crisis.

Although government expenditures also increased, the loss of revenues explains the Hungarian deficit indicator to a greater extent.

Moreover, the deficit in 2021 cannot be called historic in any way. Between 2002 and 2006, the country had a deficit of approximately this size or even higher every year.

The level of the Hungarian deficit in the last two years cannot be considered high even in an international comparison, compared to the period 2002-2006.

Moreover, the high deficit was now necessary according to economic theories.

The anti-cyclical economic policy of the Hungarian government has done a lot to make the losses due to the pandemic bearable and financeable.

Source: novekedes.hu

(Cover photo: Facebook/Balázs Orbán)