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IMF warns Hungary not to celebrate budget consolidation just yet

The International Monetary Fund on Monday said that while Hungary had made great strides in sorting out its economy much work remained to be done as a delegation gave its annual report on Hungary's economy in Budapest.

Hungary is in the middle of a fiscal consolidation drive aimed at reducing the nation's massive budget deficit. Even with an austerity package that raised taxes, cut spending and targeted reform, the 2006 budget deficit came in at 9.2% of GDP, by far the largest in the European Union. „Despite important and evident progress, the task ahead remains an important, challenging and even formidable one,” Ashoka Mody, Assistant Director of the IMF's European department, told a press conference. „Our view is that the vulnerabilities have been damped but it is early to declare victory.” The government is targeting a budget deficit of 6.6% in 2007 and 4.3% in 2008. The IMF's report predicted 6.5% and 4.5% respectively, lower estimates than those put out by the European Commission on the same day. The commission estimated figures of 6.8% and 4.9%.

While Mody said that while this showed the IMF believed the government's figures were largely credible, there were risks to be considered, particularly with regard to the government going back on a promise to freeze public sector wages in 2008. Hungary's ultimate goal is to reduce the budget deficit to Maastricht levels - 3% - and its convergence program predicts a deficit of 3.2% by 2009. However, Mody warned that even should the government reach that target it should start to consider longer-term measures. „Even if the fiscal consolidation is achieved, Hungary will have a high deficit and high government expenditure,” he said. „A new generation of fiscal reforms is needed to fundamentally reorient Hungary's fiscal affairs.”

The IMF report said that government expenditure would still be close to 50% of GDP with the measures, and said it should be further reduced to within 40-45% of GDP. Mody said that more reforms were needed in healthcare, pensions, local government, adding that a simplified tax structure be of great benefit and would help whiten the economy. (