Hungary to cut spending in last ditch bid to escape EU punishment

By bne IntelliNews May 13, 2013

bne -

Hungary announced a spending freeze on May 10 as it made a last minute stab at persuading Brussels to allow it to exit the EU's excessive deficit procedure. However, it's just that sort of short-term reactionary policy that international lenders have urged Budapest to cease.

"The government will freeze HUF92.9bn (€310m) of budget expenditure, worth around 0.3% of gross domestic product, in order to exit the procedure," Economy Minister Mihaly Varga told journalists, according to AFP, without specifying the measures entailed. A further €500m of savings could be made in 2014 if the European Commission requires, he added. According to the economy ministry website, those additional savings could include a freeze on one-off infrastructure investment projects, and a hike in the special taxes on banks and energy suppliers.

Hungary's budget shortfall came in at 1.9% of GDP in 2012, while the government targets a gap of 2.7% in both this year and next. However, in its spring forecast released last week, the European Commission projects a 3.0% deficit for this year, and 3.3% for 2014, which it said would not grant Hungary an exit from the EDP - which takes as its basis the 3.0% deficit threshold contained in the Maastricht Treaty.

While the country has been in the EDP since it joined the bloc in 2004, its urgency to exit this year is the result of the long-winded policy war Budapest has been waging with Brussels. During one particularly bad-tempered spat, the EU's meeting of finance ministers - Ecofin - announced that if Hungary did not finally get its act together, then it would lose EU cohesion funds worth around €500m.

Budapest has until May 29 to submit any budget amendments for consideration by Ecofin, which will make its decision on EDP exits on June 22. While numerous countries are stuck in the process, it is only for Hungary that the situation has become headlines, and a matter of short term bargaining. That illustrates that Brussels does have some means to exert pressure on Budapest, despite the Fidesz government's recent penchant to brush off its requests on legislation.

On the one hand, the short-term, one-off measures Budapest is suggesting is exactly the sort of policy that the International Monetary Fund (IMF) and EU complained about as they discussed a potential bailout last year, with the international lenders calling for strategic and systemic reform. The fact that the banks - mostly owned by Eurozone groups and very unhappy with their treatment - could be hit yet again will not impress either. On the other, few expect the EU to press on its threat to Hungary's cohesion funds, with analysts suggesting ECOFIN will delay its decision yet again.

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