EU Proposes Hungary Aid Freeze, Prompting Spending-Cut Plan
February 23, 2012, 1:55 AM ESTBy James G. Neuger and Zoltan Simon
(Updates with government spokesmen in fourth paragraph, markets in sixth, Economy Ministry in seventh.)
Feb. 22 (Bloomberg) -- The European Commission proposed to suspend 495 million euros ($655 million) in development subsidies to press Hungary to narrow its budget deficit, prompting Prime Minister Viktor Orban to announce spending cuts.
The freeze would affect 29 percent of Hungary’s so-called cohesion fund allotment for 2013, the European Union executive said in a statement today. The commission last month said the country failed to curb its budget deficit in a sustainable way.
“This decision today is to be regarded as an incentive to correct a deviation, not a punishment,” European Union Economic and Monetary Commissioner Olli Rehn told reporters in Brussels. “It is a fair and proportionate measure of a preventive nature. Hungary has until the first of January next year to bring its deficit back on track and avoid these consequences. I trust it can and will do so.”
Hungary considers the Commission’s proposal “unfounded and unfair,” government spokesmen Peter Szijjarto and Andras Giro- Szasz said in a joint e-mail. It’s also “legally debatable” and is contrary to the “spirit” of EU treaties by imposing sanctions on a violation which has yet to take place, they said.
Spending Cuts
Orban is trying to revive bailout talks with the EU and the International Monetary Fund. The premier ordered his Cabinet ministers to propose cuts in drug spending for 2012 and 2013 and to reduce expenditures on the Budapest public transport company next year, according to a directive published in the Official Gazette that was e-mailed today. He also ordered an immediate freeze in the government’s purchases of cars and mobile phones.
The forint dropped 0.9 percent to 288.93 per euro at 1:10 p.m. in Budapest, weakening the most since Feb. 10. Drugmaker Egis Gyogyszergyar Nyrt. dropped 2.5 percent, the most in a week, to trade at 16,300 forint. Gedeon Richter Nyrt., the country’s biggest drugmaker, slid 0.5 percent to 38,000 forint.
Hungary will use “all tools” to meet its budget-deficit target of 2.5 percent of gross domestic product this year “under all circumstances,” the Economy Ministry said in an e- mailed statement today.
‘Cautiously Optimistic’
“We are cautiously optimistic about these announcements” by the Cabinet, Janos Samu, an economist at Concorde Securities in Budapest, said in a report today. “They indicate that the government is aware of the fiscal challenges, though it should be no revelation after so many warnings.”
The government has argued that its planned multiyear spending cuts will yield the necessary savings to end the reliance on one-time revenue measures to meet deficit goals. The government targets a shortfall of 2.2 percent of GDP in 2013.
The European Commission on Jan. 11 said the government has failed to take “effective action” to rein in the deficit in a “sustainable nature.” Budget sustainability underwent a “severe deterioration” last year, which was masked by one-time measures, the EU executive said.
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.
Special Taxes
The Cabinet plans to end special taxes on the energy, retail and telecommunications industries and cut the bank levy by half from 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, Economy Ministry State Secretary Zoltan Csefalvay said Feb. 14.
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 narrow the deficit to within 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.
Losing cohesion funding may threaten investments aimed at fostering economic growth. Hungary’s forecast for GDP this year ranges between stagnation and 0.5 percent growth, Mihaly Varga, Orban’s chief of staff, said on Feb. 19. The government’s official forecast is still 0.5 percent.
Growth Forecast
The IMF is reviewing its 0.3 percent growth forecast for 2012 and may reduce the estimate because of the euro area’s deteriorating outlook, Iryna Ivaschenko, the lender’s representative in Budapest, said Feb. 9. Hungary may be challenged to meet its debt payments this year if the euro crisis worsens and the economy slips into a recession, the IMF said in a Jan. 25 report, underscoring the need for a loan.
“Given the downward revision of the growth forecast for Hungary, it seems likely that additional measures will be needed,” Rehn told reporters today.
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 yesterday in Brussels.
--With assistance from Andras Gergely in Budapest. Editor: Balazs Penz, Andrew Langley
To contact the reporter on this story: Zoltan Simon in Budapest at zsimon@bloomberg.net. James G. Neuger at jneuger@bloomberg.net
To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net
