Bloomberg News

Hungary Nears EU Aid Unfreeze as New Taxes Narrow Deficit

May 11, 2012

The European Union cut its forecast for Hungary’s budget deficit after the Cabinet approved new taxes, boosting the country’s chances of unfreezing development aid the EU threatened to block over fiscal concerns.

Hungary is on track to meet its 2012 deficit target of 2.5 percent of gross domestic product and the 2013 gap may widen to 2.9 percent, compared with a previous 3.7 percent forecast, the European Commission said in its Spring Forecast, published today. The government targets a 2.2 percent shortfall in 2013.

Hungary approved taxes on banking, energy, telecommunications and insurance companies to allay European Union concern that its budget was unsustainable and to retain grants from the EU next year, which the bloc partially froze in March. Hungary is shifting levies toward consumption after the EU said the government relied on one-time measures to mask its budget gap.

The forecast “should support the decision to drop the excessive deficit procedure against Hungary,” Zoltan Torok, an economist at Raiffeisen Bank International AG (RBI) in Budapest, said in an e-mail today.

The forint weakened 0.4 percent against the euro to trade at 290.16 at 1:15 p.m. in Budapest. The benchmark BUX (BUX) stock index fell to 17,355.81 from 17,361.38.

‘Improving Effect’

Hungary has been under EU scrutiny since the country joined the bloc in 2004 for failure to meet budget targets in a sustainable way and risks losing funds next year if it fails to show it can rein in its shortfall. EU ministers in March suspended 495 million euros ($640 million) of development funds.

Hungary’s 2012 euro-convergence program “contains numerous additional saving measures including tax increases, the introduction of new taxes such as the financial transaction tax, and expenditure cuts, mainly in the area of budgetary chapters and drug subsidies, altogether with a gross budgetary improving effect of close to 2 percent of GDP,” the commission said.

The new levies are “worrisome from both an inflationary and an economic growth perspective,” Torok said, adding that the taxes may boost the consumer-price index by 0.4 percent next year to an average 4 percent, surpassing the central bank’s 3 percent target.

Inflation Accelerates

Hungary’s April inflation, the fastest in the European Union, unexpectedly accelerated on surging fuel and tobacco costs. Consumer prices rose 5.7 percent from a year earlier after a 5.5 percent increase in March, the statistics office said today.

The Magyar Nemzeti Bank, which targets 3 percent inflation, on April 24 left the benchmark interest rate unchanged at 7 percent, the EU’s highest, for a fourth month, citing delays in the government’s talks for financial assistance from the International Monetary Fund and planned tax increases that may boost inflation.

The economy may contract 0.3 percent this year and expand 1 percent next year, the commission said. The government debt level may decline to 78.5 percent of GDP this year from 80.6 percent last year and drop to 78 percent in 2013, according to the EU’s executive.

To contact the reporter 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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