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Govt submits bill establishing exemption from state debt reduction rule till 2016

Banking

Hungary’s government has submitted a bill to Parliament that would establish an exemption for a rule in the new constitution prohibiting any increase of state debt as a percentage of GDP.

The new constitution, which comes into force from the start of 2012, prohibits the approval of any fiscal legislation that causes state debt as a percentage of GDP to rise until the proportion reaches 50%.

The "bill on financial stability" submitted by National Economy Minister Gyorgy Matolcsy says budgets in the intermediate period, until 2015, "must be drafted based on deficit targets set by the government in the Convergence Programme from the spring of 2011 in the interest of ensuring the reduction in state debt".

From 2016, the bill would limit any increase in state debt to half of the difference between expected inflation and real-term GDP growth.

The 2008 fiscal responsibility act which contains the current rules on setting budget targets in order to prevent a rise of state debt will no longer be in effect from January 1, 2012, when the "bill on financial stability" is to take effect.

Budget bills will have to include a debt target for the end of the budget year.

The bill would require - from the time the legislation comes into force - the government to submit to Parliament modifications to the budget act if a quarterly review suggests targets for the reduction of debt will not be met.

The bill would authorise the government to ask Parliament to suspend the obligation to meet fiscal targets during "sustained and significant downturns....when the real value of annual gross domestic product falls".

The amount of state debt in foreign currency would be calculated based on a single exchange rate when computing the debt under the bill.

In the 2011 Convergence Programme, the government projected Hungary’s gross government debt would fall to 75.5% of GDP in 2011, to 72.1% in 2012, to 69.7% in 2013, to 66.7% in 2014 and to 64.1% in 2015.

The bill would tighten conditions for borrowing by local councils, allowing municipalities to take out loans to cover operating costs, but requiring central government approval for development loans.

The bill would require approval by the Fiscal Council - a body comprising the National Bank of Hungary governor, the head of the State Audit Office and an independent economist appointed by the president - of any bills that would change the fiscal expenditure or revenue framework, affecting the deficit, before a final vote is taken.

The bill would mandate the Fiscal Council to express its opinions on the planning and implementation of the budget as well as on any questions about the use of public funding quarterly.

The bill establishes "cardinal" rules requiring a two-thirds majority in Parliament.

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