November 7, 2012 / 2:21 PM / 5 years ago

Hungary to seal "distortionary" 2013 budget

BUDAPEST (Reuters) - Hungary said on Wednesday it will finalize its 2013 budget after the European Commission forecast the deficit within a target ceiling, even though Brussels called the government’s tax plans “distortionary”.

The EU’s executive also noted there was “considerable uncertainty” about the credit backstop that Hungary has been discussing with international lenders for nearly a year.

Prime Minister Viktor Orban has often been at loggerheads with Brussels over deficit cutting tactics that included a $14 billion nationalization of private pension savings and special taxes on banks and big businesses.

The Commission forecast Hungary’s deficit below its 3 percent of gross domestic product ceiling both this year and next but warned that the deficit would overshoot that threshold in 2014 and some of the measures adopted could crimp growth in the long run after a recession this year.

“The figures ... clearly demonstrate that the Commission has acknowledged that the Hungarian government and the economy minister have managed to put the economy on a good path,” government spokesman Andras Giro-Szasz told a news conference.

Economy Minister Gyorgy Matolcsy expressed optimism that the assessment would allow Hungary to avoid penalties for repeatedly breaching the EU’s budget deficit ceiling.

Matolcsy, the architect of Hungary’s unorthodox policies, said he would analyze the figures and propose any necessary new measures to the government next week to keep the deficit at the government’s 2.7 percent of output target next year.

“We have set the 2.7 percent deficit target as our objective, which gives us great certainty when looking forward to the two-stage process of being removed from the excessive deficit procedure in March and June,” he said.

After a recession in 2012, the Commission sees economic growth of just 0.3 percent in Hungary next year, below the government’s forecast, and said the deficit could again rise above the 3 percent mark in 2014.

Matolcsy disagreed with that outlook, saying new car sector investments alone would lift economic growth above 1 percent next year, upgrading his own 0.9 percent forecast issued just a few weeks ago.

The government has said the Commission’s assessment of its latest measures could have a bearing on the IMF/EU talks but on Wednesday Matolcsy did not mention that prospect, saying only that stronger economic growth would hold down borrowing costs next year.

PACKAGES

Hungary announced two deficit-cutting packages last month, geared mainly towards tax hikes, which the Commission said would help cut the shortfall by 1.5 percent of economic output.

“The economy is characterized by weak potential growth, partly caused by policy uncertainty and increasingly distortionary taxes, most notably very high extra burdens on the financial sector,” it said.

Budapest, which hopes to avoid the loss of millions of euros of EU development funding by staying within the EU deficit ceiling, is aiming for a deficit of 2.7 percent of gross domestic product for both 2012 and 2013.

The Commission said even with the government’s latest measures, Hungary would just scrape below the 3 percent of GDP threshold next year if extraordinary budget reserves worth 1.75 percent of GDP are cancelled to offset expected slippage. ($1 = 220.7 Hungarian forints) (Reporting by Gergely Szakacs; Editing by Ruth Pitchford)

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