The government has eased tension related to the central budget deficit by introducing a new calculation method, which includes the effects of Hungary’s pension reform in 1997. As of Dec. 1, mandatory pension funds will be included in the public sector deficit calculations, and the funds’ incomes will be administered as revenues of the state, making the public sector deficit look much smaller than in the previous calculation method. The subsequent fall of the deficit will balance out, or even exceed, the surge that is expected until the end of the year.

The reasoning behind the new deficit calculation method says that since 1998 a part of pension payments goes into private pension funds, and the state has to fill up the resulting gap in the state pension system, thus the status of the central budget is affected by the new pension scheme. However, that effect is minimal, say others, as pension funds are currently at the stage of collecting contributions – no payments have been made to date – and most of the money that ends up with the funds is reinvested into government bonds and T-bills.

Due to the opposing views, some new EU member states, such as Poland, do not include such calculations in their public sector deficit reports. Eurostat, the EU’s statistics office, now seems likely to accept the new members’ reasoning, but the derogation Hungary and five other new members now enjoy will expire in March 2007.

The new methodology, however, will not change the fact that Hungary’s public sector deficit will be bigger than planned, contrary to strict government measures. Finance Minister Tibor Draskovics announced in March that the deficit will be 4.6% of GDP by year end. The latest expectations now put the deficit at 5.3% of GDP, but only on condition that state revenues in December will balance out the HUF 100 billion deficit that occurred in November.