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Hungary will miss deficit targets in 2006, 2007, EU says

Hungary's budget deficit will widen further in the next two years, moving the country further away from euro adoption limits and its target of adopting the common currency in 2010, the European Commission said according to Bloomberg.

The shortfall may balloon to 6.7% of gross domestic product this year and to 7% of GDP in 2007 from 6.1% last year, the EU's executive arm said in a report published in Brussels today. The government wants to cut the deficit to 4.7% this year and 3.3% in 2007. Prime Minister Ferenc Gyurcsány's government, which won a second four-year term in last month's election, missed its budget deficit target in each of the past four years.
Hungary must overhaul public finances and cut spending to avoid more overruns, the commission said. “The budget lacks the necessary structural reforms targeting expenditure reduction,” the EU said in the report. “Expenditures are projected to be higher than officially estimated. Based on the usual no-policy change assumption, the budgetary position is expected to worsen in 2007.”
Hungary must cut the budget deficit in half by 2008 to meet the EU's target of 3% of GDP and qualify for euro adoption two years later. The shortfall reached 51% of this year's target by the end of March. Gyurcsány's Socialist party, the winner of the April election, is counting on accelerating economic growth, stricter tax collection and a cheaper state bureaucracy to trim the deficit. The party also promised to spend Ft 10 trillion ($49 billion) of mostly EU money to build roads, schools and hospitals in the next 10 years. Gyurcsány pledged to continue his plan of cutting taxes by Ft 1 trillion through 2010. The EU's wider 2007 deficit projection is “chiefly due to the second step of the planned tax cuts,” the commission said.
The commission, which on Jan. 11 rejected Hungary's budget deficit-cutting plan, gave the government until Sept. 1 to submit a revised program and say how it will curb the shortfall.