Thomas Escritt in Budapest -

Hungary's parliament passed a budget for 2011 on November 16 that will make good on the government's promise to bring in a budget deficit below 3%, by balancing cuts to corporation and personal income tax with a range of sectoral windfall taxes and a raid on pensions.

While analysts are pleased that the budget - which was unveiled two weeks ago, six weeks after the legal deadline, and introduced to parliament on November 15 - will keep government borrowing in check, there are major uncertainties about the sustainability of the measures, which rely on revenue-raising measures while doing little to cut or restructure public spending.

In a note, Peter Atard Montalto, emerging markets analysts at Nomura, wrote: "I think the 2.94% deficit target is achievable... albeit it rests on poor anti-growth and almost totally revenue-side measures. There seem to be no necessary expenditure-side reforms and in general any expenditure-side measures are pretty small."

At heart, this budget is the result of a tension between the government's desire to implement a long-term industrial and demographic policy to ensure growth in decades to come and the shorter-term challenge of financing the country's spending over the coming few years.

Prime Minister Viktor Orban, whose populist conservative government came to power in the spring promising to cut taxes, create jobs and spur growth, has in recent speeches concentrated on the long-term perspective. Campaign promises to create 1m jobs over the next decade were followed in October by a speech in which he promised that a flat tax with incentives for families with many children would help raise the birth rate. In a speech to businessmen, the PM said: "Hungary is missing a million jobs and a million children. If we had all of that, then Hungary's economic troubles could be solved without any great strife."

Pension raid

Few of the measures came as a surprise. The possibility of dipping into the country's €2.1bn private pension assets was already under discussion in the spring when Orban learned that the International Monetary Fund and the EU would not underwrite the government's planned tax cuts, while the latest round of windfall taxes - a total of HUF520bn a year on the primarily foreign-owned retailers, telecommunications companies and energy companies that are among Hungary's largest employers - were being leaked soon after the initial HUF200bn banking windfall tax was announced in the summer.

The National Bank of Hungary, the country's Budgetary Council and a host of bank analysts have criticised the revenue-raising measures for being anti-growth and unsustainable. Andras Simor, governor of the National Bank, echoed analysts' concerns over the sustainability of the revenue-raising measures. "There can be no doubt about meeting the deficit targets for this year and next. The 2011 budget was drawn up conservatively, with substantial reserves." The problem, he said, was that "in both years, this is being achieved with one-off, temporary revenues, while there is no sign of spending cuts."

There is much uncertainty over the numbers. While the windfall taxes were originally proposed for three years, the budget as published suggests that the taxes could be maintained, at a lower level, for longer.

The pension measures are more problematic. For the next 14 months, the government will pocket HUF30bn in employees' monthly pension contributions rather than transferring them to the country's private pension funds. In addition, a law has been passed making it possible for employers with existing private pension savings to opt back into the public pension system in exchange for an ill-defined promise of a larger state pension on retirement - in effect making a gift of their savings to the government.

The proposals - which could drive smaller funds into bankruptcy - have been heavily criticised as government interference into a private contracts between savers and their pension schemes. In addition, there is great uncertainty over how many will choose to opt back in to the public system. While the government has publicly said it expects 90% of savers to return to the public pension insurance pillar, its own budgetary calculations assume just 20% of total savings will revert to the state treasury.

The budget is a gamble. The government hopes that demographic transformation over the long term will offset the risk of landing a future government with a substantial bill in unfunded pensions, while it hopes that job creation and investment resulting from lower corporation taxes will compensate for lower levels of investment by the primarily foreign companies that are hit by the windfall taxes.

Whatever the risks, the government seems determined. When the constitutional court ruled two weeks ago that a supertax on public sector severance packages of more than HUF2m was unconstitutional, the government responded with threats to remove budgetary matters from the court's purview, in a move that was interpreted as a sign that any legal challenges to the pensions raid would be overruled by the government's parliamentary majority.