Central bank outlines economic challenges


Reviewing the findings of a similar analysis, the central bank of Hungary (MNB) said that the country still stands to benefit from the swiftest possible introduction of the euro.

Measures to foster growth, such as cutting payroll taxes and minimizing disincentives for taking jobs, would improve the chances for a successful and sustainable fiscal consolidation, but these steps should be taken only while remaining on the path Hungary has set in its convergence program, according to the MNB study summarizing euro-convergence, published on the bank's website on Wednesday.The study notes that the risk to Hungary's adoption of the euro have become clearer in the period since the last study, citing Portugal or Italy as examples. Attaining and maintaining a low fiscal deficit are key to managing attached risks, the study said.

The study says risk to Hungary's adoption of the euro should be reduced through further product and labor market reforms to create a competitive economy with high employment and increasing productivity, allowing the country to take full advantage of the euro. Though it notes that these reforms should be implemented regardless of the aim to join the euro-zone.

The fiscal consolidation is, in contrast, closely connected with euro accession, the study says. Hungary must continue its fiscal consolidation even after it reaches the 3% of GDP deficit threshold for adopting the euro, because it must achieve a budget position that allows it to manage possible economic shocks with only fiscal tools after giving up monetary tools with its euro-zone accession. The consolidation should continue until Hungary reaches its mid-term goal of a 0.5% of GDP deficit ratio. The study says that legislation on public finances - legislation that enjoys broad support in Parliament - would help the process of fiscal consolidation.

The sustainability of the fiscal consolidation will be endangered if it has adverse effects on long-term growth, the study warned.

The study's authors therefore urge growth-friendly measures, such as the reduction of payroll taxes and the elimination of regulations that at present discourage people from taking jobs. These measures would not only spur growth, but also boost the chance for the long-term success of the country's budget consolidation. The challenge is to take these steps strictly in keeping with the path set in Hungary's convergence program, they said.

Hungary's GDP growth slowed to 1.3% in 2007 from 4% in 2006 after the government introduced a fiscal adjustment program in the autumn of 2006.

The study was published just a few days after Standard and Poor's said tax cuts planned by the government for 2009 were “ill-timed” and further demonstrate Hungarians' fading appetite for consolidation in its announcement of a downgrade of the outlook for the country's sovereign rating to negative from stable.

The government is drawing up several scenarios for the tax changes - among them reductions to payroll taxes - and discussing them with experts. Though Finance Minister Veres said on Tuesday that rising yields will likely reduce the tax savings from the changes from an earlier projected Ft 200 billion – Ft 250 billion. (MTI-Econews)

Moody's Assigns A1 Ratings to MBH Mortgage Bank Covered Bond... Ratings

Moody's Assigns A1 Ratings to MBH Mortgage Bank Covered Bond...

EU's New Biometric Entry System Postponed Until November EU

EU's New Biometric Entry System Postponed Until November

Avg Blue-collar Hourly Wage Climbs 13.5% in Q2 HR

Avg Blue-collar Hourly Wage Climbs 13.5% in Q2

CATL Debrecen Becomes Sponsor of Campus Festival In Hungary

CATL Debrecen Becomes Sponsor of Campus Festival


Producing journalism that is worthy of the name is a costly business. For 27 years, the publishers, editors and reporters of the Budapest Business Journal have striven to bring you business news that works, information that you can trust, that is factual, accurate and presented without fear or favor.
Newspaper organizations across the globe have struggled to find a business model that allows them to continue to excel, without compromising their ability to perform. Most recently, some have experimented with the idea of involving their most important stakeholders, their readers.
We would like to offer that same opportunity to our readers. We would like to invite you to help us deliver the quality business journalism you require. Hit our Support the BBJ button and you can choose the how much and how often you send us your contributions.