The European Commission projects Hungary's general government deficit will reach 3.3% of GDP in 2012, over the government's 2.5% target, forecasts published on Friday show.
The Commission noted in its fresh spring forecast that if all measures in a structural reform program unveiled in March are "taken at face value", that is without considering implementation risks, the 2012 deficit would be "just below 3% of GDP".
The Commission said implementation risks for the structural reform program "could be higher than forecast" notably with regard to a nominal freeze on public sector wages and spending for goods and services. "The possibility that the government may take further steps to implement the consolidation package in full can also not be excluded" and corporate tax income could rise faster than assumed now as the economy recovers, it added.
The Commission said Hungary would have a general government surplus of 1.6% of GDP in 2011.
The government projects a 2.0%-of-GDP surplus for 2011 because of the transfer of assets from private pension funds to the state.
The Commission said assets repatriated from the private pension funds would generate revenue equivalent to about 9% of GDP. However, government decisions to assume the debt of the Budapest Public Transport Company (BKV) and state-owned railway company MAV as well as to buy out some public private partnerships (PPPs) will result in one-off outlays of 2% of GDP. Excluding these extraordinary items, the headline deficit would be a little over 6% of GDP, it added.
The Commission projects Hungary's economy will grow by 2.7% in 2011 and 2.6% in 2012, under the government's respective targets of 3.1% and 3.0%.
Hungary's economic growth has been fueled by exports but domestic demand will start contributing from 2011, accounting for 1.5 percentage points of growth for the year, the Commission said. Net exports will contribute about one percentage point to GDP growth this year, it added. The composition of growth is expected to remain similar in 2012, taking into account the effect of the country's structural reform program and consolidation measures announced in the Convergence Program, it said.
The Commission sees exports rising 9.6% in 2011 and 9.2 in 2012, outpacing import growth of 9.3% and 8.6% in the respective years.
The Commission said inflation is likely to start falling in 2011 as the stronger forint mediates the impact of higher energy prices. It said CPI would fall from 4.7% in 2010, when it was lifted mainly by imported inflation and poorly anchored inflationary expectations as well as indirect tax increases, to 4.0% in 2011 and 3.5% in 2012, still exceeding the central bank's 3% mid-term "price stability" target.
The Commission sees Hungary's government debt falling from 80.2% of GDP in 2010 to 75.2% in 2011 and 72.7% in 2012. While the takeover of debt from BKV and MAV add up to 1.4% of GDP and the cost of buying out PPPs is expected to reach 0.6% of GDP, government securities from the private pension fund assets to be withdrawn will reduce state debt by about 4% of GDP and the gradual liquidation of foreign securities among the assets will come to 3% of GDP over the two years. The Commission noted that its projections assume no reduction in the existing forex deposits at the National Bank of Hungary equivalent to about 3% of GDP -- and including money from am IMF-led bailout in 2008 -- and a stronger forint compared to exchange rates at the end of 2010.
The government projects state debt will fall to 75.5% of GDP in 2011 and to 72.1% of GDP in 2012.