New fiscal adjustment package in Hungary

The Hungarian Minister of National Economy Mihály Varga announced this Friday that in order to ensure that the European Commission’s excessive deficit procedure (EDP) against the country is lifted, the government will freeze HUF 92.9 billion (appr. EUR 300 million) in the 2013 budget.

This measure is equal to about 0.3% of GDP, which is the exact difference between the European Commission's projections for the country's deficit in 2013 and those of the Government, the minister pointed out.

He added that if the Commission deems the freeze insufficient, the on-going financing of major one-off government investments may also be suspended, providing additional savings of around 0.2% of GDP. However, these projects could be continued if covered with revenue from the sale of state assets.

If the two measures, together worth HUF 150 billion still prove insufficient, the government is ready to raise special taxes on banks, the income tax of energy suppliers and the financial transaction tax if needed.

As the financial website portfolio.hu notes, purely on the basis of the numbers announced, the Varga package could be enough for Hungary to reach its deficit target. But as the European Commission disputes several measures (e.g. the nominal freeze of certain cash benefits) there is no guarantee that Brussels will deem the planned adjustment sufficient.

“As for the structure of the package we can say the cabinet uses the routine of spending freezes that could be regarded as a one-off measure. It also keeps up its hope that the macroeconomic situation will improve that could lead to fiscal improvement and persuade the EC to reassess its prognoses,” the analysis points out.

The third step in the package, the analyst notes, is virtually a threat, saying that if the EU does not think the first two steps will be enough then the cabinet will hike the sectoral taxes, despite a repeated objection to these levies by the EU executive.