BUDAPEST, March 2 (Reuters) - Hungary’s government needs to table credible and concrete fiscal reforms by July and implement them thoroughly in order to retain investors’ confidence.
Prime Minister Viktor Orban’s centre-right Fidesz party government remains a runaway favourite with voters even though public support has declined slightly since last year’s election landslide.
Fidesz has retained a three-to-one lead ahead of the main opposition Socialists as it rejected austerity measures and taxed big businesses to plug the budget deficit.
Earlier this week, the government presented steps which it says will reduce public debt to 65-70 percent of economic output by the end of 2014 from around 80 percent now, by cutting public spending, but the lack of detail disappointed markets.
The main risk to the announced reforms, which will involve cuts in disability pensions, drug subsidies, unemployment benefits and education, is that they may be watered down if the government meets social resistance.
Implementation risk is also high given Hungary’s poor track record on fiscal discipline, and the government’s recent moves to tax big foreign companies and renationalise private pension funds to avoid painful austerity measures.
The European Union could also decide to extend its excessive deficit procedure against Hungary if it rules that a one-off budget surplus this year due to the impact of pension changes will not improve the structural deficit in a sustainable way.
Private pension funds have also flagged legal action in both Hungary and at European level against the effective renationalisation of the mandatory private pension fund pillar.
All three major credit rating agencies have said they could cut Hungary’s debt to junk level from just above if the fiscal reform plan is not credible, so markets will be closely watching their assessment.
What to watch:
— details on planned structural reforms
— EU comments on pension changes, fiscal sustainability
— rating agencies’ view on reforms
There is a risk that the government will decide to raise or keep in place various taxes on the business sector if its proposed measures do not produce the required savings — as its recent decision to extend a bank levy into 2012 showed.
Abandoning plans announced last year, the government has also postponed a reduction in the corporate tax rate to 10 percent from 19 percent for big business from 2013 to cut public debt and limit the need for savings elsewhere.
What to watch:
— details on bank tax regime next year and in 2013/14
— comments on the future of “crisis” taxes on businesses, which are due to expire at the end of 2012
With a government-sponsored amendment to the central bank law, parliament has assumed the right to fill the four vacant spots on the central bank’s Monetary Council this month, stripping the governor of his right to name two policy makers.
A parliamentary committee controlled by the ruling Fidesz party will pick four new rate setters by March 7.
The government has criticised the bank’s interest rate rises between November and January that took its main lending rate to 6 percent, saying the steps were unjustified and ran counter to its pro-growth economic policy.
The prime minister has also said he would have sacked the bank’s Governor Andras Simor if he had been able to.
What to watch:
— who the four new rate setters will be, their views.
— any further attacks on Governor Simor and the bank.
— any attempts to meddle in monetary policy.
— monetary stimulus measures to boost economic growth.
Compiled by Gergely Szakacs, editing by Paul Taylor