Hungary to cut government wage bill to limit deficit

History

Hungary's government plans to cut the total amount it pays its employees by 10% next year to help cap spending and ensure inflation remains within its forecast, according to a senior official who asked to remain anonymous. The government is committed to keeping inflation below 5.5%, compared with the central bank's estimate of about 7% for next year, the official said in a phone interview yesterday. There won't be any wage pressure in the economy because of increased fiscal spending, said the official, who is involved in drawing up the budget. That should help stabilize the forint. The government's commitment to cut the deficit is a good sign, analysts said, including Lars Christensen at Danske Bank. “The Hungarian government is finally doing the right thing,'' Christensen, an emerging markets strategist in Copenhagen, said in a television interview today. “We now have a government that is willing to tighten fiscal policy substantially. What's important is that they are trying to do something about public finances.'' The forint rose to as much as 279.18 per euro after the wage announcement and traded at 281.39 at 12:29 p.m. in Budapest.
The currency has fallen as much as 6.3% against the euro this month, partly on concern that government plans to raise taxes and increase regulated prices will push inflation higher and stall Hungary's adoption of the euro, planned for 2010. The prospect of faster inflation led the central bank to raise its benchmark two-week deposit rate for the first time in two-and-a-half years on June 19. Any increases in state wages next year will have to be compensated with pay cuts for other employees, the official said. The reduction will help Prime Minister Ferenc Gyurcsány's government control the budget deficit without pushing up prices. The government will spend Ft 2 trillion ($8.9 billion) on state wages this year, or about 20% of its total expenditure. On June 24, Gyurcsány reiterated his forecast for the annual inflation rate to return to about 3% in 2008 after accelerating next year. The rate was 2.8% in May. Hungary will cap public spending for next year at this year's budgeted level and start overhauling health care, education and pensions this year to help cut the deficit, the largest in the European Union, Gyurcsány told journalists at the end of a two-day government meeting.
State-funded institutions will also be required to keep emergency reserves as a safeguard against spending overruns, he said. Neither will they be allowed to spend any money left over from previous years. The government set a timetable for the pace of reform, the premier told journalists. Stricter targets will be introduced to avoid a sixth consecutive year of overspending in 2007, he added. Gyurcsány said he will cut the budget deficit by 350 billion forint ($1.6 billion) this year to reach a revised target of 8% of gross domestic product, rather than the original target of 4.7%. “The aim of the deficit cut is to create a balanced budget and the aim of the reforms is to maintain that balance,'' Gyurcsány said. “We are creating a bond between balance, reforms and development.''
Gyurcsány plans to reduce the budget deficit to 5% of GDP in 2007 and “near'' 3% of GDP in 2008. The forint has plunged to a record low on concern the government won't be able to cut the deficit enough to adopt the euro in 2010 as planned. The government's economic policies may stoke inflation, which in turn may force the central bank to raise interest rates further. At 6.25%, the benchmark rate is already the EU's highest. The government is doing “everything possible'' to stabilize the currency, Finance Minister János Veres told journalists. The currency reached 282.15 a euro on June 23, close to its euro parity rate of 282.36, from which it is allowed to rise or fall by 15%. It has lost 10.3% this year, the third worst performance by a European currency behind the Icelandic krona and the Turkish lira. Hungary will adopt a new convergence plan, which outlines the path to euro adoption, at a government meeting on Aug. 31. The EU gave the country until Sept. 1 to submit a revision after rejecting the original plan in January.

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