Ongoing fiscal easing in a number of CEE countries

While Romania is a definite cause for concern, Hungary and Poland will at least keep the headline deficit below 3% of GDP in the coming years

‘Can your country's budget balance realistically reach the MTO according to the most recent convergence report?'

Croatia: The MTO for Croatia is set at -1.75% of GDP and in 2017 and 2018 the government plans a budget deficit of -1.3% of GDP and -0.8% of GDP, respectively, which should translate into -1.6% of GDP and -1.7% of GDP of structural deficit figures. We are bit skeptical on two fronts regarding the plan and forecasts. Firstly, we see the budget deficit figure at a somewhat higher level, more precisely at -1.5% of GDP in both years, as there is always a risk of some fiscal slippages and there is still no clear view on union demands regarding wages. In addition, we are not sure whether the output gap will already be closed in 2017, given that this will be only the second year of more robust growth.

Czech Republic: For 2017, the central government budget deficit is approved to arrive at CZK 60bn, which is approx. in line with the mid-term budget target (-1% GDP). The MoF expects a structural deficit of -0.6% GDP in 2017 and -0.3% in 2018. However, the final figures will be better. First, the approved budget includes, in our view, a buffer. And second, favorable economic development will spill over into the fiscal policy figures. We expect a much lower overall deficit this year (CZK 30bn) and a structural deficit of roughly zero, but the current tax income and lower (than expected) expenditures should imply better results.

Hungary: The medium-term objective for the structural budget deficit target is 1.5% of GDP and is unlikely to be met in the coming years, as the government has been planning a higher deficit for 2017 and 2018 in preparations for the parliamentary elections in 2018. According to the latest Convergence Report of Hungary, the structural deficit may reach 2.5% and 2.4% of GDP in 2017 and 2018, respectively. We note that the GDP growth rate projection of 4.3% for 2018 is optimistic (vs. our forecast of 2.8%). In addition, the potential GDP growth rate is likely overestimated at 3.6% by about 1-1.5pp.

Poland: The Ministry of Finance expects the structural deficit to decrease by 0.4 pp and reach 2.9% and 2.4% of GDP in 2017 and 2018, respectively. The European Commission, in its latest forecast, remained critical in its evaluation of the consolidation efforts, as it sees the structural deficit in Poland at 3.2% and 3.1% of GDP in 2017 and 2018, meaning that the required 0.5pp consolidation will not be met. The main source of the MinFin's optimism in projecting such a decrease in the structural deficit is closing the VAT gap, which is, in our view, an ambitious goal. Further, the European Commission sees the possibility of a lower deficit only if the improved tax collection yields better than expected results. Another MinFin assumption is that consolidation of expenditures will also take place in the coming years. Yet, the lowering of the statutory age or increasing public investment (new budgeting period 2014-20) as well as the expected lowering of VAT by 1pp from 23% after 2018 pose risks to meeting the MTO in 2021 as declared in the convergence program.

Romania: The rise in potential GDP projected by the MinFin (4.5% for 2017) looks slightly optimistic and is based on a strong contribution from investments. Recent years have shown investments swinging up and down on a path that has been difficult to predict, while fiscal easing has so far failed to spur public investments (last year's relapse speaks volumes about this). In view of this, the risks for the structural deficit are that it will depart even more from the MTO assumed through the Fiscal Compact in 2012 (1% of GDP). Based on recent expansionary fiscal and wage policy, the structural budget deficit increased to 2.6% of GDP from 0.6% in 2015. Unless remedies are put in place, the deficit could expand further to 4% in 2017, especially as the local economy is cruising above its potential.

Slovakia: The Stability Report expects the MTO target of the structurally balanced budget (-0.5% of GDP) to already be reached in 2018, a year earlier than required. The 2018 nominal and structural deficits are expected to fall to 0.5% and 0.4% of GDP, respectively. There is no change for 2017 – the nominal deficit is expected at 1.3% of GDP, as the structural deficit should fall to 1% of GDP. The consolidation effort for 2017 and 2018 is expected at 0.4% and 0.6% of GDP, respectively. Overall if we remain on the right track, reaching the MTO next year could be realistic, given the good cyclical position of the economy and the favorable development of tax revenues. However, our fiscal deficit forecasts are slightly higher, at 1.5% and 0.8% of GDP for 2017 and 2018, respectively. Thus the question remains open for now.

Slovenia: The Slovenian MoF targets a rather optimistic deficit trajectory, as the deficit should be reduced from 1.8% of GDP in 2016 to 0.8% of GDP in 2017 and further to 0.2% of GDP in 2018. Part of the reduction should come from unclassified/undisclosed one-offs of 0.4% of GDP in both years, which we are taking with a grain of salt. While we also see the consolidation process continuing, we maintain a slightly more cautious stance, as higher compensation in the public sector implies higher pressure on the expenditure side, and consequently weighs on budget deficit levels. Our deficit projections stand at -1.7% of GDP and -1.5% of GDP for these two years.

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