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Tax measures leave “question marks” for 2012, says City

The temporary extra tax measures announced by Hungary's prime minister, imposed on the telecoms, energy and supermarket sectors to shore up public finances, still leave fiscal “question marks” for 2012, London-based emerging markets analysts said on Thursday.

In a note released to investors in London, Capital Economics, a major financial consultancy, said it had recently estimated that measures worth around HUF 350bn would be needed to cut the deficit to 3% of GDP next year. “For 2011 at least, yesterday's plans comfortably exceed this, and should allow the government to at least come close to reaching its target”. However, the temporary nature of the measures means that “there are bigger question marks over 2012 ... (and) in the absence of a sharp recovery in the economy – which we think unlikely – further fiscal measures are likely to be needed to prevent the deficit from rising again in 2012”.

Moreover, the government “has shirked the need for structural reforms”, particularly regarding Hungary's comparatively high levels of social spending.

All told, the announcement is likely to be welcomed by the markets. But "we remain cautiously pessimistic that the current government will deliver on its fiscal promises – a view that is likely to be shared by the ratings agencies". The deficit will come in between 3-3.5pc of GDP next year, and while this should be enough to stabilise public debt at just under 80pc of GDP, the stock of debt will remain the highest in the region for some time to come. As a result, the government is still treading a fine line and the forint remains vulnerable to shifts in investor sentiment, Capital Economics said.

In a separate comment released on Thursday, JP Morgan said that based on what has been announced so far, the deficit reduction comes “mostly from distortive taxes on various sectors”, with no substantive expenditure-side cuts or reforms. “Indeed, there was no mention of cuts in public sector wages or other costs”.

However, it is possible that some spending cuts will be announced on Monday when the plans are submitted to parliament in full, “improving the quality of the fiscal adjustment”, JP Morgan said. (MTI-Econews)