hungary: assessing the impact of the package istván hamecz director head of economics and monetary...
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Hungary: assessing the impact of the package
István HameczDirector
Head of Economics and Monetary Policy Directorate
ESA deficit expected for 2006
Inflation riport -7,8%Changes:Partial motorway cost -0,6%Change in the fiscal path -0,5%Base case ESA deficit -8,8%Iraq -0,2%APV investments -0,4%ESA deficit -9,4%
The change in the fiscal path (2006)
Flood -0,2%Housing subsidy 0,0%Public transport -0,2%Investment promotion -0,1%Gas price compensation -0,4%EU cofinancing -0,1%Departmental spending -0,4%Local governments -0,1%Social Security -0,1%Total increase -1,7%
The fiscal adjustment (2006)
Net additional revenues 0,8%primary impact 0,9%secondary impact -0,1%Gas price increase 0,1%Price subsidies 0,2%Closure of expenditures 0,2%Total adjustment 1,2%Demand impact (GFS) -0,5%Additional demand APV -0,4%Demand impact (SNA) -0,8%
Expected fiscal performance after the adjustments
2006 2007 2008ESA 9,0-9,4-9,7 4,2-4,6-5,4 3,5-4,0-4,8Methodological risk 0,5 1,0 1,0SNA 10,1-10,6-10,9 5,8-6,2-7,0 5,1-5,6-6,4Fiscal demand 1,1-1,6-1,9 (-4,8)-(-4,4)-(-3,6) (-1,1)-(-0,6)-0,2
Fiscal demand impact developments
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1992
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On the expected impact• 4 „pure type” (Horváth et al, MNB
Ocasional Papers 52, 2006)• The standard shock makes 1% of
GDP fiscal adjustment• Current adjustment: Linear
combination of the 4 pure shock• The tool we have used: MNB NEM
model– Neo-keynesian model, backward
looking expectations– estimated for the Hungarian economy
1. Fiscal consolidation through goods markets
• Cut in public consumption or investment
• relative large first year growth drop (0,5-0,9 multiplier)
• The negative impact of investment cut is smaller due to higher import content
• Positive but small inflationary impact: max -0,35% after 3 years
2. Consolidation through disposable income
• Indirect effects – tax hikes, transfer reductions– Through disposable income– Important: No supply side
reactions modeled• The effects „slowly” appears• Smaller output loss in the short
run, larger in the long run• Small positive inflationary impact
3. Consolidation through labour markets
• Reducing public employment or increasing social security contributions (SSC)
• Slow but strong impacts• Largest long term GDP sacrifice• Inflation: different in the two scenario
– SSC case increases inflation– Reduction in employment decreases
inflation• SSC case raises a monetary policy
dilemma
4. Consolidation through prices or inflation
• (non-energy) regulated price hikes or indirect taxation
• indirect taxation: temporary rise in inflation and small GDP decline
• (non-energy) regulated price: persistent inflationary impact, larger negative long term growth impact– It raises monetary policy dilemma
The monetary policy dilemma • Three type of adjustment from monetary
policy point of view– GDP hardly change, inflation rises temporary
(VAT case, 4A)– GDP and inflation both declines in the short
run (1, 2)– GDP declines, inflation rises in the short run
(regulated prices, SSC increase, 3, 4B)• The implied monetary policy reaction
– 1st type: no reaction needed– 2nd type: policy loosening– 3rd type: ambiguous policy reactions
• How important is the inflation in the reaction function?
• How well anchored the inflationary expectations are?
Our preliminary quantitative assessment
Inflation Report May 2006GDP Inflation CA
20064,5 2,1 8,320074,2 3,3 8,220083,8 3,2 8,0
After the adjustmentGDP Inflation CA
20064,5 3,3 8,320072,0-3,0 6,0-7,0 5,0-6,020082,0-3,0 3,5-4,5 5,0-6,0
Qualitative assessment• First step to the right direction to
reduce vulnerabilities• Poor quality from the long term
sustainability point of view– Revenue oriented– Inflationary
• Fiscal transparency has not improved (so far)
• Poor communication