Bloomberg News

EU Urges Hungary to Expand Budget Cuts on Wider Fiscal-Deficit Estimate

March 09, 2012

The European Commission, which proposed penalizing Hungary for budget overruns, raised its estimate for the country’s shortfall for this year and 2013 and is urging the Cabinet to implement further budget cuts.

The deficit may be 3 percent of gross domestic product this year, compared with a 2.75 percent January forecast and the government’s 2.5 percent target, according to a document posted on the European Union’s website. For 2013, the commission sees a 3.6 percent gap, compared with a 3.25 percent January forecast and the Cabinet’s 2.2 percent target. Budapest-based news website Portfolio first published the information.

The European Union’s executive arm last month proposed suspending 495 million euros ($655 million) in development subsidies to press Hungary to narrow its budget deficit in a sustainable way. EU finance ministers will in “all certainty” approve the proposal this month, Peter Szijjarto, Prime Minister Viktor Orban’s spokesman, said March 5, adding that Hungary would take the necessary measures to avoid losing the grants.

The threat puts pressure on Orban to reach an agreement with international lenders on financial aid even as the suspension of funds is “unlikely,” Pasquale Diana and Jaroslaw Strzalkowski, Morgan Stanley (MS) economists in London, said Feb. 27.

The commission said March 7 that Hungary failed to resolve disputes blocking the start of talks on an EU and International Monetary Fund loan four months after Orban requested financial aid. Orban sought IMF help in November as the forint fell to a record and Hungary’s sovereign credit grade was cut to junk.

‘Take Steps’

The commission’s working paper, dated March 6, underpins a proposal adopted the same day giving Hungary six months to “take steps to correct its excessive deficit in a sustainable and credible manner by 2012.” EU rules specify that governments keep the annual budget deficit below 3 percent. The proposal will be discussed by EU finance ministers on March 13.

The commission on Feb. 23 cut its estimate for Hungary’s gross domestic product. The economy will contract 0.1 percent this year instead of an earlier projection for 0.5 percent growth, it said. Next year, the economy may grow 1.6 percent.

The government sees economic performance ranging between stagnation and 0.5 percent growth this year, Mihaly Varga, Orban’s chief of staff, said Feb. 20.

‘Overall Weakening’

“The growth outlook deteriorated over the course of 2011 due to the overall weakening of the international environment, which played out over several channels, as well as to the further contraction in domestic demand linked also to policy uncertainties,” the commission document said.

This year’s deficit estimate of 3 percent takes into account 0.9 percent of GDP worth of revenue expected from extraordinary industry taxes that the government has pledged to end after 2012. Hungary’s budget deficit reached 50 percent of the annual target in the first two months of this year, the Economy Ministry said March 7.

The 2013 forecast doesn’t take into account a government plan for further spending cuts of 0.4 percent of GDP, announced last month, because they “have not been sufficiently substantiated yet,” the working paper said.

The commission paper recommends a full implementation of the government’s multiyear economic overhaul plan as well as “means-testing” the universal family tax allowance or benefits program. A value-based residential property tax and “enhancing the progressive nature of the flat income tax scheme” may boost revenue.

To contact the reporters on this story: Zoltan Simon in Budapest at zsimon@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net


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