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Hungary wants sustainable fiscal policy, new head of Fiscal Council says

Hungary is committed to making its public finances sustainable with restructuring and reducing budget spending and lowering public debt, Zsigmond Járai, recently appointed chairman of the revamped Fiscal Council, said on Friday.

"There's a need for a drastic restructuring of the budget. It seems to me that the government has realized that they need to reduce the total expenditure," Járai said in an interview with Dow Jones Newswires.

Expressing opinion about the government's economic policy isn't part of the duties of the Fiscal Council. The Fiscal Council's job is to examine whether the fiscal plans are credible and whether the plans are possible to implement, with the latter including sustainability, Járai said.

The next task of the Fiscal Council will begin after Tuesday, when Hungary plans to announce much-touted structural measures. The measures carried out so far have been "steps taken in the right direction," Járai said. However, "the positive measures haven't been acknowledged by financial markets because, in the meantime, steps were taken that went against predictability," he said.
"These included the extraordinary taxes and the battle with the International Monetary Fund, which have reduced predictability. Those could also result in a drop in investment but, probably, not at such a big rate as markets reckon."

Last year, all major rating agencies downgraded Hungary to one notch from junk on fiscal sustainability worries. Also in 2010, Hungary unexpectedly broke with the IMF after the opposition Fidesz party won a general election with a landslide and refused to implement further austerity measures. Instead, it levied extraordinary taxes on banks, telecommunications, retail and energy firms for three years to raise additional budget revenues, Dow Jones recalled.

"After the initial swing, when it looked as if the budget deficit could be boosted--but it became obvious that the IMF, EU and financial markets weren't making that a feasible path--the government decided to reduce it to close to 3% of GDP. That's the right direction," Járai said. Járai noted that the government has promised the extraordinary taxes will disappear eventually and that this year's budget will be special because of the private pension fund assets the government redirected to the state budget. "The government proposals include that they won't spend that extra income," he said.

The government plans to reduce the size of the redistribution of budget revenues in the coming years. The current level of redistribution of over 50% of GDP is too high, Járai said, agreeing with plans to reduce it to 48% of GDP this year and 46% by 2013. "It should be below 40% of GDP in ten years' time." Járai said.

Járai, termed by Dow Jones "a friend of Prime Minister Viktor Orbán and his economic adviser", also welcomed the government's plan to include a section on prudent fiscal policy in the new constitution Fidesz is preparing. "There's no good level for public debt. It's worth targeting a continuous decline. A zero level would be the ideal level, although I know that's a radical thought," Járai said.

Hungary should aim for adopting the euro but, it's too early to set an adoption target date, he said.
"Hungary's small and open economy is perhaps the most integrated with the EU's economy, even more than Ireland and Belgium. There's no other choice for Hungary than the euro."

The country has missed several self-imposed euro target dates, "undermining our credibility," Járai said. "The economic policy steps required for the euro--low inflation, low interest rate levels, shrinking public debt, a low budget deficit--would also serve Hungary's interests," Járai added, noting that Hungary could be in a position in seven to eight years' time to consider adopting the euro.