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EC forecast puts Hungary deficit under 3% threshold in 2012, 2013

The European Commission projects Hungary\'s general government deficit will be under the 3% of GDP threshold in 2012 and 2013 in its European Economic Forecast for spring published on Friday. The forecast puts the deficit at 2.5% of GDP in 2012 and 2.9% in 2013.

The projection for 2012 is down from 2.8% forecast last autumn.

The deficit projections in Hungary\'s updated Convergence Program submitted to Brussels are 2.5% for 2012 and 2.2% for 2013.

The EC said the revised projections in the spring forecasts took into account further savings adopted in the 2012 budget as well as the permanent effect of the better than expected 2012 budget balance, but these are expected to be offset by deteriorating growth prospects, higher interest expenditures and some spending slippages. It added that one-off measures, such as another round of transfers from the private to the state pension pillar, accounting of EU fund absorption and the public transport sector would raise revenue.

The EC noted that the updated Convergence Program showed an extraordinary fiscal reserved of almost 0.4% of GDP for 2012, but it said the spring forecast assumes none of this will be left because of spending slippages worth about half a percent of GDP mainly related to drug subsidies, the transport sector, and a lack of details on budget appropriation cuts.

The spring forecast puts Hungary\'s state debt at 78.5% of GDP in 2012 and at 78.0% in 2013. The projections compare to respective targets of 78.4% and 77.0% in the updated Convergence Program.

Hungary\'s economy is set to contract by 0.3% in 2012 but grow by 1.0% in 2013, according to the fresh forecast.

The EC said there was \"no recovery in sight\" for domestic demand over the forecast horizon. It added that a tax on financial transactions approved by the government days earlier would weigh on consumption next year.

The financial transactions tax is also expected to negatively impact investments, together with other measures, the EC said. It added that big investments already scheduled in the automotive industry would mediate these effects.

German carmaker Daimler started production at a big plant in Hungary in April, and big capacity expansions at the local units of peers Audi and Opel are expected to go online soon.

The EC said these automotive industry investments would also support export growth as domestic demand contracts.

The EC sees inflation accelerating to 5.5% in 2012 but slowing to 3.9% in 2013. It said the financial transactions tax and other new tax measures imply that inflation is likely to remain \"well above\" the central bank\'s 3% mid-term target over the forecast horizon.

The unemployment rate is set to edge down to 10.6% in 2012 and fall to 9.6% in 2013, according to the forecast.