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Fiscal tightening measures condition for drawing down fourth part of EU loan

Government measures - some already approved by Parliament and others under debate - to cut spending as well as planned structural changes are among the conditions for Hungary to draw down the fourth part of its EU loan, the agreement for calling down the tranche published on the website of the Finance Ministry shows.

The €6.5 billion EU loan is part of a €20 billion stand-by arrangement from the EU and the World Bank that Hungary signed for in the autumn, after its government securities market locked up. Hungary called down €2 billion from the EU loan in December and another €2 billion at the end of March. It signed for the third €1.5 billion tranche, to be called down by the end of June, on Thursday, and is expected to call down the fourth and last tranche of €1 billion in Q4.

In the agreement for calling down the fourth tranche, the EU lays down conditions for budget consolidation, budget oversight, financial market regulation and oversight and structural reforms.

Budget consolidation measures for 2009 include halving the second half of wage compensation for public sector workers whose annual bonuses were eliminated, and scrapping fully the present home purchase subsidy system from July 1.

Conditions affecting the 2010 budget include eliminating public sector workers' annual bonus, which is equivalent to a full month's pay, and freezing at nominal value overall spending on public sector wages. Measures should be approved that will generate long-term savings of HUF 40 billion in spending for public transportation, especially in the case of transfers to state-owned railway company MAV. The budget consolidation measures must be fully built in the 2010 budget in order to reduce Hungary's general government deficit as a proportion of GDP to 3.8% (the upward revised convergence program target) or lower (from an upward revised 3.9% target for 2009).

Any surplus budget revenue must be used to reduce the deficit.

The agreement calls for a review of the 2010 budget by the budget council and parliamentary committees by the end of September in line with a late 2009 law ensuring budgetary discipline.

The EU says Hungary must continue its progress in the area of financial market regulation and oversight. It must also ensure that measures to support the financial sector are in line with EU norms and it must report any such support measures to Brussels in a timely manner.

Among the structural reforms Hungary must make under the agreement are ones reducing the age of children eligible for family support subsidies from 23 to 20 and cutting the period parents are eligible for child-care support from three to two years. (President László Sólyom returned proposed legislation that would introduce these measures to Parliament for reconsideration on Thursday, arguing that it was important to maintain the option for mothers to freely decide when to return to work.) Gas and district-heating subsidies must be cut further in 2010 and households must contribute more to the cost of school meals. Steps, including legislative ones, must be taken to cut local council spending by HUF 120 billion. Reductions in payroll tax designed to reduce Hungary's tax wedge must be accompanied by an increase in taxes on consumption or assets. (Opposition party Fidesz has said it would scrap the planned tax on property and vehicles valued at more than HUF 30 million if it comes to power.)

The EU says Hungary must report monthly on the implementation of the economic policy criteria of the agreement in addition to earlier agreed on reporting obligations. It must also produce a monthly report on the transactions on a special account for the EU loan. (MTI – Econews)