The European Commission projects Hungary's economy will expand by 2.8 % in 2011, unchanged from its projection in the spring. The Commission forecasts that Hungary will meet the 3.8 % public finance deficit target for 2010 but will overshoot the respective targets for 2011 and 2012.
The fresh biannual forecast is slightly under the government's projection of 3% of GDP growth for 2011. The Commission raised its projection for GDP growth in 2010 to 1.1 % in the autumn forecast from stagnation in the spring.
A "moderate recovery" -- supported mostly by exports as domestic consumption remains "subdued" -- is underway in Hungary, the Commission said. Looking forward, household consumption is expected to receive a boost from the introduction of a flat-rate 16 % personal income tax and tax credits for families with children from 2011.
The Commission says "crisis taxes" levied on the energy, telecommunications, retail and banking sectors could have an unfavourable effect on investment and consumption, but acknowledged the effect of the taxes on narrowing the general government deficit.
The Commission projects that Hungary's public finance deficit will fall to 3.8% of GDP in 2010, in line with the government target. It sees the gap widening to 4.7% in 2011, assuming that the crisis taxes remain in place and taking into account the "positive impact of the economic recovery".
The Hungarian government projects that the deficit will fall to 2.9% of GDP in 2011.
However, the Commission says it had not included significant structural reforms in the forecast for 2011 because these were absent from the government's budget draft. Nor did it include the effect of government measures to bring mandatory private pension fund members back to the state pension pillar.
The Commission expects the deficit to widen even further to 6.2% in 2012. The rise is explained by the Commission's assumption that the suspension of payments to mandatory private pension funds will end and revenue from the extraordinary bank levy will drop.
National Economy Minister György Matolcsy reacted that the Commission's projections were "not credible and were professionally unfounded". THe added that the government would stand by its own projections.
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