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Debt Dynamics and Sustainability

Hungary’s government debt and its sustainability is a current issue from many different aspects. Applying debt-dynamic analyses, in the first part of this paper, the author examines what periods the last twelve years can be split into with regard to economic policy. His most important conclusion is that in spite of the similar rate of increase in the gross debt of the general government as a proportion of GDP in the periods from 2002 to 2006 and from 2007 to 2010, the reasons are markedly different. After that, from the several tests of debt sustainability, he makes first an analysis based on fiscal reaction function, at the aid of which tries to quantify the correction mechanisms of the Hungarian economic policy in the last two decades and to compare them with international examples. There are several reasons for the analysis of the difference between the real interest and the real growth rate. On the one hand, it shows that Hungary’s government debt left the sustainable path in 2001/2002. On the other hand, according to its estimations on the primary gap, with the difference between the real interest and the real growth rate unchanged, the general government deficit of around 4 percent of GDP, typical in the past few years, may be enough to stabilise the debt ratio. However, in order to reduce the gross government debt to GDP ratio below 60 percent within the next 5-10 years, the balance has to be improved by 1 or 2 percentage points.