Hungary to cut public debt, raise taxes

Hungary is to further reduce its public debt in October and November, taking it down from 77% of gross domestic product to 73%, Prime Minister Viktor Orbán told a news conference after a cabinet meeting on Tuesday.

The prime minister noted that when the new constitution is enacted on January 1, 2012, the government would be required to reduce the public debt to below 50% of GDP. He added that if the country manages to keep annual budget deficits at around 2.8% of GDP then the public debt level would decrease automatically.

In the next two months, two large-scale loans are to expire, which the government will not extend, he said, adding that the planned debt reduction would amount to EUR 4 billion, of which EUR 3 billion would come from foreign currency reserves and one billion from foreign shares acquired during the transfer of pension funds.

The prime minister added that the Fidesz-led coalition would discuss further measures to combat financial problems at a full-day meeting this Sunday. The government must decide, for instance, on how to finance HUF 250 billion (EUR 906.6 m) of VAT repayments to companies, after a European Court ruled the tax had been illegal.

Hungary also faces a 100-billion-forint hole in this year's budget due to lower-than-expected growth. Economy Minister György Matolcsy said the government had lowered its GDP growth forecast both for this year and 2012 to around 2% from 3%.

He said the extra revenue needed to plug the hole will accrue thanks to better tax collection and a complete ban on purchases in the public administration, resulting in combined income and savings of 80 billion forints.

Another 10 billion forints is expected to flow in from excise and sales tax hikes on gambling (50%), tobacco (7%), spirits (50%) and other alcoholic beverages (5%), as well as by raising the tax on diesel from 97 to 110 forints a liter.

The last 10 billion forints would be collected from dividends on shares the state had acquired with private pension savings transferred to state funds earlier, the minister added.