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Economy: Get debt down

The central bank is proposing stricter debt targets than thoses set by the government. According to the MNB, the 50% debt target requires a fiscal deficit level of 0.5% of GDP.

In light of the European debt crisis and Hungary’s euro preparedness, it is of the utmost importance for Hungary to assess its fiscal room for maneuver as well as its long-term fiscal sustainability, the National Bank of Hungary (MNB) said in its latest analysis of the convergence process.

The cornerstones of the fiscal framework currently applicable to Hungary are represented by the Maastricht deficit (3% of GDP) and debt criteria (60% of GDP), as well as the country’s 50% debt-to-GDP medium-term budgetary objective (MTO) set forth in the new Constitution and the Act on Fiscal Responsibility.  

In the medium-term, the structural position of Hungary’s budget will not be able to drop anywhere near the MTO, unless the government succeeds in the full implementation of all measures announced under its various programs, including the structural reform program, the convergence program and the 2012 budget bill, the MNB said in its report.

If all measures are implemented in full and the structural deficit is maintained at 1.5% of GDP in line with EU rules, Hungary’s public debt may fall to 56-57% by the end of the decade. However, even in this case, government debt is likely to exceed the regional average and will limit the room for fiscal maneuver for many years.

Therefore, the MNB says that fiscal policy should aim for much stricter debt levels than the Maastricht criteria in order to have adequate room for fiscal maneuver to smooth external shocks in the absence of independent monetary policy.

According to the MNB, a gross debt target of 50% is impossible to achieve unless the medium-term deficit target is defined more strictly than the MTO, at around 0.5%. Reaching a 40% debt level, which is closer to the regional average and is more in line with Hungary’s current stage of development, could only be guaranteed at a structural surplus of nearly 1%.

The MNB noted that risks related to the implementation of the planned measures are high and that even if the position of the national budget improves over the medium-term as debt levels decrease, the quality issues of long-term sustainability still have to be solved.