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Hungarian economy turning corner but challenges remain

When Hungarian Prime Minister Ferenc Gyurcsány about a year ago announced wide-ranging measures aimed at cutting the nation's huge budget deficit, many were skeptical for their chances of success.

Hungary has a history of broken promises in this regard and has been under the European Commission's excessive deficit procedure since 2004, when it first joined the EU. Yet in June the commission delivered a positive report on Hungary's efforts, saying that the government was well on course to meet the recommendation of correcting the deficit by 2009. The positive assessment is a far cry from the atmosphere last June, when Gyurcsány’s Socialist-Liberal coalition celebrated winning re-election by bringing in an austerity package that raised taxes, hiked energy prices and promised reform.

The 2006 deficit target eventually rose to 10.1% of GDP even with the austerity measures - around double the pre-election figure. Things only got worse when anti-government riots broke out in September following Gyurcsány’s admission he had lied about the state of the economy before the elections. The political and social turmoil lasted for months. And yet despite all the problems, HungaryItaly next on 4.4%, it was still well below the targeted figure.

The 2007 target has now been lowered from 6.8% to 6.6% on the back of higher-than-expected tax revenues and social contributions. Gyurcsány this week said that this target could be lowered further, and the Hungarian central bank believes that the final 2007 deficit figure will hit around 6%. has passed the milestones so far as it aims to meet a deficit target of 3.2% in 2009. While the 2006 deficit at 9.2% was the largest in the EU, with

The consolidation has taken its toll, though…
Inflation has ballooned, hitting a peak of 9% in March before dropping slightly, interest rates are running at 8%, and GDP growth is expected to fall to 2.2% this year from 3.9% last year. Most observers feel the worst is almost over, though, and the central bank is predicting five-per-cent inflation by yearend. Analyst consensus is that the bank will soon begin to cut interest rates. So far so good, it would seem, but the economy already saw a false dawn when Lajos Bokros, Finance Minister from 1995-96, introduced his austerity package.

The economic woes returned shortly afterwards. Gyurcsány has said the only task remaining is to “stay disciplined.” The International Monetary Fund (IMF) warned it is too early to celebrate. Ashoka Mody, assistant director of the IMF in Europe, recently said that the task ahead was 'a formidable one' as he delivered the IMF's annual report on Hungary's economy. Mody warned of upcoming threats, in particular raising concern that the government would fail to freeze public sector wages in 2008 as promised.

Another criticism leveled at the austerity measures was that they did not cut spending enough, and many feel more cuts are needed in key areas such as local government. According to the euro convergence program, general government expenditure will be reduced from 52.9% of GDP in 2006 to 46.6% in 2009. The IMF called for a target of between 40% and 45%. Another potential problem is that other key reforms have been held up, particularly in healthcare. Much of the work - including cutting beds and drug subsidies as well as introducing fees for visiting the doctor - is complete, but the coalition parties cannot agree on the form of a new health-insurance model.

Credit rating agency Standard & Poor's is amongst those worried the government will have to loosen the purse strings to recover from these poor ratings. In the longer term, the IMF believes Hungary needs a further phase of reform beyond what it called the current “emergency measures”. “A new generation of fiscal reforms is needed to fundamentally reorient Hungary's fiscal affairs,” Mody said last month. “These will carry Hungary into a longer period of fiscal discipline and promote growth.” (news.monstersandcritics.com)