Hungary's budget plan is the `Right Direction'

Hungary's budget plan is the `Right Direction,' Kornai says. Hungary's plan to cut the European Union's largest budget deficit is the `right direction,' wrote János Kornai, an economics professor at Harvard University and the London School of Economics. “The program of correction points to the right direction from a macroeconomic point of view,'' Kornai wrote in an article published in Népszabadság. “The size of the package, its total volume, is one of the most important indicators of the seriousness and commitment of the correction's intent and thus deserves due attention.'' Prime Minister Ferenc Gyurcsány wants to cut the shortfall to about 3% of gross domestic product in 2008 from a revised target of 8% this year. He is raising taxes, increasing government-controlled prices and cutting the size of state bureaucracy to save money. The central bank, credit rating companies and investors have criticized the package for relying too heavily on higher taxes instead of spending cuts. The role of raising expenditures in reducing the shortfall isn't always the best indicator of a plan's sustainability, Kornai argues. “The clincher in this respect is not whether the changes are made on the expenditure or the revenue side, but how difficult or easy it is to reverse them,'' Kornai wrote. Still, the government must be “vigilant'' that there's a relatively large number of items in PM Gyurcsány's plan that can be reversed and should strive to cement the measures, he added. Gyurcsány on June 10 said he will cut the shortfall by Ft 350 billion ($1.6 billion) this year and a further Ft 1 trillion each next year and in 2008. The cuts are worth 3.5% of GDP in the second half this year and as much as 4.5% next year, according to Kornai. Of this year's deficit cuts, Ft 170 billion will come from lower spending and Ft 180 billion from increased revenue, Gyurcsány said when he announced his plan. The forint has dropped 6.7% this month, on concern that the government's plan may not be sustainable and that some of the measures will stoke inflation. While the first market reaction was negative, that may change if the cabinet proves to be committed to its budget objectives, according to Kornai. “What really matters is what will happen in practice,'' Kornai wrote. “The commitment of the prime minister and the small squad of his colleagues is already apparent.'' (Ng, Bloomberg)