Hungary to keep deficit in check

By bne IntelliNews December 7, 2012

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Hungary must keep up the pace of its fiscal consolidation and keep its deficit below 3% of GDP through 2013 in order to escape the EU's Excessive Deficit Procedure, a senior government official said on December 6. While the pledge will likely unsettle already wary investors, it illustrates that Budapest is apparently oblivious to all but the (most basic) stick.

Both Budapest and the EU forecast that Hungary will this year see its deficit drop below Brussels' threshold for the first time since the country joined the bloc in 2004. However, Mihaly Varga, minister in charge of Hungary's (now practically defunct) talks over a bailout with the International Monetary Fund (IMF), was quoted by Reuters as telling a conference: "We cannot do anything else in 2013 either. We can only get out of the Excessive Deficit Procedure if the deficit remains below 3% in three successive years."

However, there are differences of opinion in Brussels and Budapest over what happened last year, and what is likely in the near future.

While Hungary's official figures suggest it finished 2011 with a surplus of close to 5%, most analysts suggest that without the essential nationalisation of around €10bn in private pension fund assets last year, the result would actually have been a budgetary hole of 5% or so.

At the same time, although Hungary has made a big deal of the European Commission's November forecast that it will now hit the deficit target in 2012 and 2013, the government has studiously ignored Brussels' prediction that the following year will see the budget out of whack by 3.5%. "In 2011 we have achieved [the deficit target]," Varga claimed. "In 2012 the deficit will be 2.7-2.8% [of GDP] and we cannot do anything else in 2013 otherwise we will have to confront the European Commission about the EDP in the most sensitive period before the elections."

If Budapest's record thus far on fiscal consolidation - which has seen it hammer the banks and utilities with tax hikes and new levies rather than risk upsetting the electorate with spending cuts and reform - wasn't enough to make that sound extremely scary for investors, the fact the ruling Fidesz party will face parliamentary elections in the first half of 2014 should.

While the government has proved erratic, but ultimately erred on the side of domestic political populism at the cost of enraging both the EU and IMF over the last year, it was clearly seriously rattled by a threat earlier in the year that it could lose EU development funds unless it finally exits the EDP.

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