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Hungary must have structural reforms to sustain budget achievements – Simor

Without structural reforms, Hungary will not be able to keep its deficit below 3% of GDP permanently, Central Bank (MNB) Governor András Simor said on Friday.

Speaking at a business breakfast organized by ING Bank he welcomed a number of fiscal adjustment measures, but urged further steps to make consolidation successful. Hungary is en route to cut its bloated budget deficit (9.2% of GDP in 2006) to around 6.2% in 2007. Simor said it was likely that 2007 and 2008 budget goals would be met, but there are more uncertainties ahead from 2009 onward, mostly because of what was experienced in previous election years. (General elections are to be held in 2010 and government spending tends to jump in years when votes all of a sudden become immensely important.)

Simor said that while measures carried out so far affected quite a few areas, he could not grasp what the whole system would be changing. In respect of the structure of adjustment, he highlighted that it was mostly focused on revenue increase, adding that the actions had been half-baked. “Whatever tax they saw on the list, they raised it," Simor noted. Simor also said it was not the best choice ever that the government will spend its extra revenues to increase spending. With regard to the structural problems of the adjustment package, Simor said it would also lead to the erosion of the tax base, since only untaxed exports will grow, while consumption will not. In the medium-term, this could even undermine the results of the consolidation, he stressed. Another tough consequence of the austerity measures is that they are driving inflation higher, thus limiting the elbow room of the central bank, since the MNB cannot promote the success of the adjustment via monetary easing.

Addressing the results of health care reform measures Simor said while these quickly reduced the deficit of social security funds, it is not sure that the actions would eventually improve the quality of services. Simor cited a few numbers to draw a picture on the structural problems of the state’s subsidy policy. Subsidies granted to state railways MÁV and budget expenditure linked to gas price subsidies amounted to Ft 380 billion or 1.5% of GDP in 2006. Significant improvement have been made in these areas. A cut of gas price subsidies saves Ft 100 billion (0.4% of GDP) and the curtailing of drug subsidies saves Ft 50-60 billion (0.2% of GDP). At the same time, gas is still 50% more expensive in the Visegrád Countries (V-4) than in Hungary.

The social transfer to GDP ratio is the highest in Hungary among the Visegrád Countries - it was 1.5-2.0 percentage points higher in 2006 than the average of the other states. According to the Convergence Program and the calculations of the NBH, social expenditures are unlikely to drop by 2008 and only a moderate fall is expected afterwards, as well. State subsidies granted for MÁV’s passenger transport unit (0.4% of GDP) is high even in EU comparison, Simor noted. Simor said three guidelines should be applied on reform measures:
- some market conditions should be allowed to enter those areas that have been protected from market impacts;
- employment must be increased and;
- a long-term sustainability of the budget balance must be achieved. (