(Updates with government reaction in sixth paragraph.)
Feb. 21 (Bloomberg) -- The European Commission will adopt a proposal tomorrow to suspend infrastructure-development subsidies to Hungary after the country failed to curb its deficit in a sustainable way, a European official said.
The commission, the European Union’s Brussels-based regulator, will propose halting the so-called cohesion funding to Hungary for one year starting on Jan. 1, 2013, the official said on condition of anonymity because the discussions are private. The decision is linked to the nation’s fiscal policy and not to recent EU infringement proceedings against the government in three areas including central-bank independence, the official said.
The move, which affects funds used to finance investment and development projects, raises pressure on Hungarian Premier Viktor Orban, who is trying to revive talks with the European Union and the International Monetary Fund on a loan. Hungary stands to lose as much as 1.7 billion euros ($2.3 billion) in 2013, or about 1.5 percent of gross domestic product, said Peter Attard Montalto, an economist at Nomura Holdings Plc in London.
“This will pose a significant drain on the budget as well as providing a hole in the balance of payments,” Montalto said today in an e-mail. “It may also slow the pace of investment in infrastructure by government.”
The forint strengthened to 286.16 per euro at 7:22 p.m. in Budapest from 287.58 yesterday. The currency has risen 9.8 percent against the euro this year, making it the best- performing in the world after losing 16 percent in the second half of last year, the most in the world.
Even if EU finance ministers were to approve a commission proposal to suspend Hungary’s cohesion funds from 2013, the government would address any fiscal concerns this spring in its updated euro convergence program and in next year’s budget, MTI state news service reported, citing Economy State Secretary Zoltan Csefalvay. That means Hungary won’t be deprived of the funds, Csefalvay said, according to MTI.
EU finance ministers are due to discuss the commission proposal in March. Losing cohesion funding may threaten investments aimed at fostering economic growth. Hungary’s forecast for gross domestic product this year ranges between stagnation and 0.5 percent growth, Mihaly Varga, Orban’s chief of staff, said on Feb. 19.
The government has argued that its planned multi-year spending cuts will yield the necessary savings to wean the budget off its reliance on one-off revenue for meeting deficit goals.
Since coming to power in 2010, Orban has effectively nationalized $14 billion of private pension funds and levied extraordinary taxes on energy, financial, retail and telecommunication companies to plug budget holes from tax cuts that failed to boost economic growth.
The Cabinet plans to end special taxes on the energy, retail and telecommunications industries and halve the bank levy starting next year. The government targets savings of 550 billion forint ($2.5 billion) this year and 900 billion forint in 2013 from budget-consolidation steps, including welfare cuts, Csefalvay said Feb. 14.
Hungary’s budget sustainability underwent a “severe deterioration” last year, which was masked by one-time measures, the European Commission said on Jan. 11. Hungary has failed to take “effective action” to rein in the deficit in a “sustainable nature,” it said.
The shortfall without one-time measures reached 252 percent of the government’s initial target for 2011, the Economy Ministry said on Jan. 9. For 2012, Hungary may reduce the budget deficit below 3 percent of GDP “on the back of a close to 0.9 percent of GDP one-off revenue” from extraordinary industry levies, the commission said. For 2013, the commission forecast a shortfall of 3.25 percent of GDP in Hungary.
Hungary can’t start talks on an international loan with the IMF and the EU until the government meets preconditions, including addressing concerns on monetary policy, the judiciary and the data-protection agency. The EU has no deadline or timeline to assess Hungary’s Feb. 17 response on the infringement procedures, a commission spokesman told reporters today in Brussels.
--Editors: Jones Hayden, Hellmuth Tromm
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