The European Commission acknowledged improvements to Hungary's balance in an assessment of its convergence program, but warned that continued structural reforms were needed to make public finances sustainable. In the short term, Hungary should keep sufficient buffers and take steps to keep the fiscal deficit below 3%.
“In spite of distinct improvements in its high imbalances, including the reduction in its budget deficit from 9.3% in 2006 to below 3.5% in 2008, Hungary has been particularly exposed to the financial crisis due to still high levels of government and external debt. Thus, to restore investor confidence Hungary adopted a policy of further fiscal adjustment and tighter deficit targets.” the Commission said.
The country's updated convergence program submitted in December outlined the government response to the financial crisis, supported by a €20 billion financial support package, including €6.5 billion from the EU. The program foresees a continuation of a front-loaded budgetary consolidation strategy, and a further reduction in the deficit to 2.6% of GDP in 2009 and to 2.2% in 2011.
The Commission noted that the government adopted in mid-February an additional corrective package of 0.7% of GDP and revised the 2009 deficit target slightly upwards because of the deteriorating macroeconomic outlook.
“The sustainability of public finances hinges on the continuation of structural reforms, as recently announced, to the extent that they increase long-term growth, help meet budgetary targets, and reduce the country’s vulnerabilities,” the Commission said.
The Commission urged Hungary, in view of the risks, to maintain adequate buffers, take the necessary measures to keep the budget deficit below 3% of GDP and ensure that adequate progress in budgetary consolidation is made, thereby setting the debt-to-GDP ratio on a declining path towards the 60% of GDP threshold; ensure full implementation of the fiscal responsibility law and continue expenditure moderation through additional structural reforms and strengthen financial market regulation and supervision; and further improve the long-term sustainability of public finances namely through a continuation of the reforms in the pension system. (MTI – Econews)