Hungary FinMin sees smaller room for tax cuts

Veres also told a business forum the government would stick to the path of deficit cuts set out in 2006. Hungarian government debt yields had surged in the past six weeks and this will boost debt service costs this year and in 2009, he noted. “As a result of changes in the Hungarian government bond market in the past six weeks, yields rose to such an extent which this year will cut the room of maneuver ... by a couple of tens of billions of forints and by more, than Ft 100 billion next year,” Veres said. Before the jump in Hungarian yields the government said there would be room for tax cuts worth about Ft 200-250 billion Hungarian in 2009. Hungary’s economic growth dropped to 1.3% last year and it badly needs a boost but the government would have to make sharp spending cuts in order to be able to reduce the tax wedge significantly, analysts and the central bank said.

Spending cuts are unlikely as the government’s popularity is at historic lows and the ruling Socialists now also face minority government after their junior coalition allies, the Free Democrats, said they would quit the government on April 30. Analysts said reforms will stall in the next two years until the next parliamentary elections in 2010, and there is a risk of the Socialists boosting spending ahead of the vote.

Veres said the government was committed to cutting the budget deficit to around 3% of GDP by next year and aimed to meet the criteria for joining ERM-2, the proving ground for euro adoption, entry next year. But he declined to say when Hungary could join the euro. Hungary has no official euro target date and currently meets none of the criteria for euro entry, as the budget deficit was 5.5% of GDP last year while inflation is seen averaging around 6% this year, and state debt was 66% of GDP at the end of 2007.

 
DEBT COSTS RISING

Analysts also say that the impact of higher debt service costs on the budget could be significant. “This, in our view, eliminates room for any significant tax cuts in 2009 ... Without any offsetting expenditure cuts even a 0.4% of GDP tax cut would eliminate the reserves and jeopardize the 3.2% of GDP deficit target in 2009”, said Eszter Gargyan at Citigroup. Hungary’s 3-year 2011/C bond traded at 9.60/52% on Thursday.

The finance minister said, that despite the political uncertainty he still saw room for passing a planned public finance law in parliament which was aimed to make budget deficit cuts sustainable in the long term via tight rules. “We met for the 14th time for cross-party talks yesterday… and there seems to be a chance that we will be able to agree on passing the legislation in parliament,” Veres said.

However, analysts say this looks unlikely. “The current political situation reduces the chances of the adoption of the fiscal rules, which have been long awaited by the markets”, Gargyan said. (Reuters)