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Hungary submits updated Convergence Program to Brussels

Hungary submitted its updated Convergence Program to the European Commission on Friday, the government said.

The program, previously updated in January 2010, shows Hungary's general government deficit is set to fall to 1.9% of GDP in 2014, helped by measures in a structural reform program announced earlier. The updated program shows Hungary's gross state debt falling to 65% of GDP in 2015.

Hungary had a general government deficit of 4.3% of GDP in 2010 and its state debt reached 80.2% of GDP at the end of the year.

The updated program shows a general government surplus of 2% of GDP in 2011, but a deficit of 2.94% if cleared of the one-off effect of the transfer of private pension fund assets. It shows deficits of 2.5% in 2012, 2.2% in 2013, 1.9% in 2014 and 1.5% in 2015. The targets are the same as those in Hungary's Structural Reform Program, based on the Széll Kálmán Plan unveiled on March 1.

The structural balance, excluding one-off items and cyclical effects, shows the deficit rising to 4% of GDP in 2010 and 4.7% in 2011, before narrowing to 2.6% in 2012 and 1.7% in 2013, as one-off items are phased out.

Between 2010 and 2012, the revenue and expenditures of the government sector will include one-off items which have a considerable positive effect on the balance: 7.7% of GDP in 2011 and 0.9% of GDP in 2012. The biggest items, to be accounted in full as revenue in 2011, are assets from private pension fund members worth the equivalent of almost 10% of GDP to be transferred to the state.

"In 2012, the program contains no longer one-off items apart from the sector-specific taxes (in relation to the financial sector, half of the total amount is regarded as one-off)," according to the program.

There are no one-off items at all in the program between 2013 and 2015 as it assumes that the crisis taxes will be eliminated in 2013.

The updated program projects a primary balance of 5.9% of GDP in 2011, 1.2% in 2012 and 1.5% in 2013.

Gross public debt is seen to decline to 75.5% of GDP by the end of 2011 and fall to 64.1% of GDP by 2015 thanks to narrowing general government deficits and the use of the transferred private pension fund assets to pay off state debt.

The general government deficit is expected to be reduced through measures affecting the labor market, the pension system, public transport, higher education, the prescription drug subsidy system, public administration and local governments as well as, to a lesser extent, the revenue side. These will improve the balance of the public sector by HUF 550 billion in 2012 and HUF 900 billion a year from 2013 onwards, according to an update of the Structural Reform Program, also published on Friday. The measures and targets are the same as those announced when the Széll Kálmán Plan was unveiled on March 1.

In 2012, four-fifths of the adjustment to the balance will come from spending cuts. In 2013, three-fourths of the improvement will be expenditure-related.

The updated convergence program projects Hungary's economic growth will reach 3.1% in 2011, then edge down to 3.0% in 2012 before gradually picking up in 2013 and 2014 to reach 3.5% in 2015 under a conservative scenario.

The updated program also shows a "dynamic" scenario under which GDP would grow 3.2% in 2011, 3.6% in 2012 and 4.8% in 2013, reaching 5.5% by 2015.

The updated program projects annual average inflation will drop to 4.0% in 2011 and to 3.4% in 2012 – in line with the National Bank of Hungary's latest forecast – before stabilizing at 3% in the following three years. The 3% "price stability" rate would be reached only in 2014 under the dynamic scenario.