Bloomberg News

EU Lifts Hungary Budget Monitoring as Orban Prepares for Polls

June 21, 2013

The European Union granted Hungary an exit from monitoring for budget offenders after nine years, a victory for Prime Minister Viktor Orban before next year’s parliamentary elections.

EU finance ministers voted in favor of releasing Hungary from the excessive-deficit procedure at a meeting in Luxembourg today, the EU said in a statement. The decision lifts the threat of a cut in development funds from the 27-nation bloc.

Orban, who sacrificed growth to keep the budget shortfall within the bloc’s limit of 3 percent of economic output, is leading political rivals in all opinion polls even after his backing has waned since he swept to power in 2010. The Cabinet this week said it will boost corporate taxes in a continuation of its policy of relying on special industry levies to plug budget holes.

“This is a major accomplishment of the Fidesz government, it improves economic fundamentals quite a bit,” Daniel Hewitt, senior economist at Barclays Plc (BARC) in London, said in a telephone interview yesterday. The Cabinet will keep the budget under control to avoid being placed back in the monitoring process and as they “seek larger independence from financial markets and foreign investors.”

The forint plunged the most in three weeks yesterday, depreciating 1.6 percent against the euro after Chairman Ben S. Bernanke said the Fed may phase out its monetary easing programs. That pared its gains in the past three months to 2.4 percent, the best performance among 31 major currencies tracked by Bloomberg.

The Hungarian currency gained 0.1 percent to 299.06 per euro by 1:33 p.m. in Budapest. The yield on the government’s dollar bonds maturing in 2023 rose two basis points, or 0.02 percentage point to 6.09 percent.

Orban’s Priority

Orban has made an exit from EU fiscal monitoring a priority to remove the threat of cuts in funding from the bloc, which accounts for 95 percent of infrastructure investments.

The Cabinet said this week it will raise taxes on financial transactions and phone calls and will require banks to pay a 7 percent charge on municipality debt taken over by the state to keep the budget on track after inflation fell to the lowest since 1974, cutting tax revenue.

The increases were unexpected after Economy Minister Mihaly Varga last month announced a 92.9 billion-forint ($410 million) spending freeze for both this year and next, adding that the Cabinet is ready to save an additional 80 billion forint next year to convince the EU that fiscal targets will be met.

‘Budget Buffer’

The deficit will be 2.7 percent of gross domestic product this year, widening to 2.9 percent in 2014, the European Commission said before last week’s measures were announced. The government estimates the gap will be 2.7 percent in each year.

“Special taxes work as a budget buffer and the government has demonstrated that it’s ready to raise them if need be,” Daniel Bebesy, who helps manage $1.5 billion at Budapest Fund Management, said by phone yesterday. Recently announced fiscal steps prove that the government will only engage in election spending to the extent that budget resources allow, he said.

The Cabinet’s reliance on extraordinary industry taxes contributed to a recession last year and has been opposed by the EU for damaging growth prospects.

The government last year backtracked on a pledge to cut a bank levy by half and introduced a financial-transaction tax. The EU and the International Monetary Fund had urged the country to ease the bank burden to boost growth after squeezing lenders to bolster the budget.

Orban has argued that the economy will expand more than the commission’s 0.2 percent forecast, allowing him to keep the shortfall within the bloc’s limit.

GDP grew 0.7 percent from the previous three months in the first quarter, expanding for the first time since 2011. The Cabinet forecasts 0.7 percent growth this year, with Orban predicting expansion of as much as 1 percent.

To contact the reporter on this story: Edith Balazs in Budapest at ebalazs1@bloomberg.net

To contact the editor responsible for this story: James M. Gomez at jagomez@bloomberg.net


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