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Cbanker says Hungary should tackle growth problem

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Hungary needs deep cuts in social spending to leave more room for economic growth which is much slower than in other central Europe states, central bank Governor András Simor said on Thursday.

“I hope that the weak performance of the Hungarian economy and the danger of falling behind (other states in the region) will open the eyes of many people,” he told a conference. Hungary’s Socialist-led government cut the budget deficit to 5.5% of GDP last year from 9.2% in 2006, but its tax hikes and subsidy cuts contributed to a drastic slowdown in economic growth to 1.3% in 2007. Other new European Union members in the region have much higher growth rates, like the Czech Republic whose economy grew by 6.5% last year.

Simor said a key cause of Hungary’s growth problem was that its state spending of about 50% of GDP remained well above the Central European average of 41.5%. “Compared to the other countries in the region Hungary has the biggest surplus in social spending an interest rate expenditures,” he said, adding that taxes should be cut and the welfare system should be streamlined so as to help boost the country’s low employment rate of about 57%.

Simor also said that Hungarian parties should agree on approving a public finance law to guarantee further deficit cuts which would also help inflation decline after a surge to an average 8.0% last year. But the Socialists are expected to rule in minority from May as the junior government member Free Democrats are to quit the coalition and analysts said the minority government was unlikely to implement deep policy changes until elections in 2010.

The Socialists have recently abandoned earlier plans to cut taxes by almost 1% of GDP next year as a rise in government bond yields due to global market jitters is seen boosting the state’s interest rate expenditures. Finance Minister János Veres said earlier this week that the government and the opposition remained at odds over the fiscal rules which would hold down budget deficits over the long term. (Reuters)

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