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EC proposes lifting of suspension on Hungary Cohesion Fund allocation

The European Commission on Wednesday said it is proposing a partial suspension on Hungary's Cohesion Fund allocation be lifted.

"The European Commission has adopted a proposal for a Council decision to lift the suspension of commitments from the Cohesion Fund for Hungary, after concluding that the country has taken the necessary action to correct its excessive deficit, in line with the Council recommendation of 13 March 2012," the Commission said.

The Commission said it concluded in its assessment that Hungary's 2.5% of GDP budget deficit is expected to be reached and the 2013 budget deficit is expected to be "well below" the 3% of GDP reference value, in spite of the slight weakening of the macroeconomic environment.

The Commission has, however, not recommended an abrogation of the Excessive Deficit Procedure (EDP) for Hungary, because - as it said - "the deficit numbers are still relatively close to the threshold, and, once again this year, it is only expected to be respected thanks to one-off measures, not structural ones that ensure a sustainable effect. This means that the uncertainty about a higher deficit is still significant. Furthermore, the track record of Hungary in the EDP also supports this cautious approach, as the country has been in excessive deficit since its accession to the EU" in 2004.

The Commission said it "will continue to closely monitor the implementation of the announced measures in response to the Council Recommendations in the context of the Excessive Deficit Procedure".

The Commission lowered its forecast for the 2013 fiscal deficit to 2.7% of GDP from a 2.9% ratio in its spring forecast published early May, based on further information on expenditure side saving measures arriving after the cut-off date of the spring forecast.

It noted, however that the consolidation steps announced lately raise some questions in terms of quality, as they are mainly concentrated on the revenue side and may hinder economic growth as they de facto replace temporary sectorial levies with permanent sectorial taxes in largely the same sectors.

"..in order to achieve a durable correction of the excessive deficit, Hungary could benefit from measures in the area of the universal child benefit (possibly in connection with the recently introduced family tax allowances), a centralized, value-based property tax and from enhancing the progressive nature of the flat income tax scheme", the document says.