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Fiscal Council puts 2010 deficit at 4% of GDP, over gov't target

Hungary's Fiscal Council, an independent body established to assess state budgets, projects the country's general government deficit will reach 4.0% of GDP in 2010, slightly over the 3.8% government target, an analysis published on Wednesday shows.

The deficit can be close to the target in the 2010 budget act because one-off or temporary factors, estimated to be worth HUF 360 billion, such as HUF 60 billion in revenue related to Hungarians leaving the private pension fund system to return to the state system or frozen stability reserves, can counter consistent overspending, the Council said. Achieving the 2010 deficit target requires strict control of spending on the operations of the state, it added.

The Council assumed existing legislation would remain unchanged when making the projections.

The Council projects some deterioration of external budget items, such as tax revenue and pension expenditures, compared to a forecast published in March, but they said this would be more than offset by lower-than-expected interest expenditures and a tax package approved in July.

The tax package includes an extraordinary three-year levy on financial institutions that will raise HUF 187 billion in 2010. The conditions for the levy in 2011-2012 will not be established until later, the government said earlier. However, the text of the law states that the tax will raise HUF 200 billion in 2011, but no figure was given for 2012.

The Council noted that it did not take into account any revenue from the levy in 2011 and 2012 because of the lack of detailed legislation. As a result, it said Hungary would likely have a deficit in its primary balance -- which excludes interest expenditures -- again in 2011. The Council added that the HUF 60 billion fall in budget revenue resulting from legislation allowing more companies to avail of a preferential corporate tax rate from July 1, 2010 would be bigger in 2011.

The Council also calculated that raising the threshold between Hungary's two personal income tax brackets from 2010 would cause a HUF 190 billion fall in budget revenue.

The legislation raising the threshold was approved by Hungary's previous government. The current government has said it will introduce a flat-rate personal income tax for families from the start of 2010.

The Council projects the general government deficit will rise to 4.2% in 2011 before falling to 3.4% in 2012.

The projections are above the targets for 2011 and 2012, of 2.8% and 2.5%, respectively, in Hungary's convergence plan.

If the government 2011 budget act to be approved in the autumn meets the requirements of the Act on Fiscal Responsibility, the balance of internal budget items - mainly expenditures and revenue from budget-funded institutions - in 2011 will be level, in nominal terms, with that in 2010. This, with the collection of the planned HUF 200 billion from the bank levy, and continued economic recovery would shave HUF 300 billion off the deficit, bringing it more than 1 percentage point lower than the 4.2% base projection for 2011, the Council said.

The Council projects Hungary's economy will grow by 1.0% in 2010, above its earlier projection. It sees GDP growth picking up to 2.9% in 2011 and 3.1%, then leveling off at 3.0% in both 2013 and 2014. (MTI-Econews)